NEW YORK (MarketWatch) — The “commodity super cycle” is dead. Now, it’s time to get used to the “commodity super down cycle, and China is the biggest reason why, warn strategists at Credit Suisse in a Thursday note.
Commodity demand tends to be very cyclical. Commodities, however, have been underperforming cyclical indicators of growth, including industrial production and new manufacturing orders (as measured by Institute for Supply Management survey data), they say.
Much of the blame is on China, the strategists argue, noting that the country remains the “most significant source” of demand for most industrial commodities.
Moreover, they see China on track for a “hard landing” at some point in the next three years. The report adds to some of the recent gloom around China, where the fate of the economy remains a topic for debate.
Standard & Poor’s Ratings Services on Wednesday said its negative outlook for Chinese property developers is casting a pall on the rest of the Asia-Pacific region, though it sees prospects for the sentiment to recover next year thanks to looser government policies, particularly on mortgages.
The Credit Suisse strategists, meanwhile, see a “triple bubble” in credit, real estate and investment. On credit, they highlight a private-sector to GDP ratio that is 30 percentage points above trend.
China’s investment share of GDP is 48%, much higher than Japan or Korea at similar stages of industrialization, Credit Suisse says. Real estate, meanwhile, is in a “classic bubble.” Prices have dropped six months in a row.
A drop of another 20% or more will make for a “hard landing,” they write. China’s not the only factor in Credit Suisse’s downbeat commodity outlook.
They also cite:
Oversupply: They find capital expenditures relative to sales in the commodity sector remains elevated, particularly among energy companies Stronger dollar: Credit Suisse remains bullish on the dollar, which is usually bad news for commodities.
They note that 64% of the time since 1980, commodity prices in dollar terms have fallen when the dollar has rallied in trade-weighted terms. Falling production costs: This is a bit of a vicious circle.
The strategists argue that as commodity prices fall, “cash costs” should also drop as capital spending and labor costs drop. That means break-even levels for producing the commodities will also fall, putting further downward pressure on cash costs.
Finally, we’ll leave you with the chart below, which Credit Suisse uses to illustrate their argument that real commodity prices remain high on a historical basis, leaving more room to the downside. They note that oil markets, in particular, have been subject to lengthy bear markets, lasting 11 to 27 years.
marketwatch.com
Commodity demand tends to be very cyclical. Commodities, however, have been underperforming cyclical indicators of growth, including industrial production and new manufacturing orders (as measured by Institute for Supply Management survey data), they say.
Much of the blame is on China, the strategists argue, noting that the country remains the “most significant source” of demand for most industrial commodities.
Moreover, they see China on track for a “hard landing” at some point in the next three years. The report adds to some of the recent gloom around China, where the fate of the economy remains a topic for debate.
Standard & Poor’s Ratings Services on Wednesday said its negative outlook for Chinese property developers is casting a pall on the rest of the Asia-Pacific region, though it sees prospects for the sentiment to recover next year thanks to looser government policies, particularly on mortgages.
The Credit Suisse strategists, meanwhile, see a “triple bubble” in credit, real estate and investment. On credit, they highlight a private-sector to GDP ratio that is 30 percentage points above trend.
China’s investment share of GDP is 48%, much higher than Japan or Korea at similar stages of industrialization, Credit Suisse says. Real estate, meanwhile, is in a “classic bubble.” Prices have dropped six months in a row.
A drop of another 20% or more will make for a “hard landing,” they write. China’s not the only factor in Credit Suisse’s downbeat commodity outlook.
They also cite:
Oversupply: They find capital expenditures relative to sales in the commodity sector remains elevated, particularly among energy companies Stronger dollar: Credit Suisse remains bullish on the dollar, which is usually bad news for commodities.
They note that 64% of the time since 1980, commodity prices in dollar terms have fallen when the dollar has rallied in trade-weighted terms. Falling production costs: This is a bit of a vicious circle.
The strategists argue that as commodity prices fall, “cash costs” should also drop as capital spending and labor costs drop. That means break-even levels for producing the commodities will also fall, putting further downward pressure on cash costs.
Finally, we’ll leave you with the chart below, which Credit Suisse uses to illustrate their argument that real commodity prices remain high on a historical basis, leaving more room to the downside. They note that oil markets, in particular, have been subject to lengthy bear markets, lasting 11 to 27 years.
marketwatch.com
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