Commodities: The End of the Bull Market

Comments Off on Commodities: The End of the Bull Market
Commodities: The End of the Bull Market

The current bull market in commodities is the longest and most broadly based in history, affecting almost every commodity.

Eventually, of course, every bull market leads to a downturn. So it’s natural to assume this bull market will end, as well. The big question is “when?” Some say it will happen within a few years. Others believe it could remain a bull market for decades. To gain insight into which view might be more accurate, let’s examine the two factors that some believe will keep these markets booming for many years to come:

  1. The growing demand from emerging economies
  2. A dwindling supply of natural resources

A common explanation offered for sustained high commodity prices is the growing demand from emerging economies. Since these economies will continue to grow for decades, the theory goes, the bull market will be sustained as well. China is the example that is typically used to drive this point. But this argument assumes that economic growth in China will produce a proportional growth in the demand for commodities. Although this may be true for oil, which we’ll cover in a minute, it is not true for base industrial metals.

The fact is, China already consumes a higher percentage of the world’s base metals than the U.S., the E.U., and Japan combined: 24 percent more copper, 59 percent more zinc, and 31 percent more aluminum.1 Interestingly, in most developed economies, the demand for base metals has remained flat for decades, as the population and GDP have grown. Why? Because they have shifted toward a more service-based economy.

Based on this historic precedent, it’s reasonable to believe that as China moves toward a developed economy, its demand for base metals will not grow substantially above what it is now. Therefore, it’s doubtful that demand from emerging countries such as China will contribute significantly to a decades-long bull market — at least, not in base metals.

Another reason commonly suggested for the latest bull market in commodities is that there is a dwindling supply of natural resources. The primary evidence offered is the weak response on the part of producers to justify higher prices in recent years. The argument is that the world must be running out of natural resources if the current high prices are not enough of an inducement to keep supply at pace with demand. But the facts don’t support this argument.

What actually has happened has been an increase over the past decade in the known reserves of most metals. For example, for every ton of copper consumed, three tons have been added to copper reserves...

To continue reading, become a paid subscriber for full access.
Already a Trends Magazine subscriber? Login for full access now.

Subscribe for as low as $195/year

  • Get 12 months of Trends that will impact your business and your life
  • Gain access to the entire Trends Research Library
  • Optional Trends monthly CDs in addition to your On-Line access
  • Receive our exclusive "Trends Investor Forecast 2015" as a free online gift
  • If you do not like what you see, you can cancel anytime and receive a 100% full refund