Relax REE, graphite, potash and uranium followers: JP Morgan says the super-cycle has a way to run
Despair not for rare earths, graphite, potash and phosphate, and uranium. Things may seem a little tight at present, but anyone who writes off the commodity sector is getting ahead of themselves. Or so says JP Morgan.
Is the super-cycle over? Not according to JP Morgan analyst Colin P. Fenton in his 2014 commodity outlook. He writes: “It has become popular, especially in the generalist media, to say that the recent commodity super-cycle is ‘over’, meaning that it has ‘stopped’. Upon reflection, it should be obvious that this claim is too glib. By definition, market cycles never stop“.
Fenton goes on to argue that the relevant question is where we are in the current market. And if the correct answer is that a given commodity super cycle has ended, then by definition it also means the next super-cycle has begun. This, in turn, means investors should be looking for strong increases in spot commodity prices over the next few years.
(It should be added here that Fenton does not apply this argument to specific commodities; he is talking only about the theory of cycles. However, as I point out below, any general continuation of the super-cycle will improve the sentiment towards commodities in general, including possibly the ones we follow here on Investor Intel.)
He believes there has been a failure to define what a commodity super-cycle actually is: it is not “a period when commodity prices rise every year”. The present super-cycle, in his view, began in October 1999, when spot and forward commodity prices arrived at multi-decade troughs. The super-cycle entered its steep ascent phase for spot prices in 2004. Fenton concludes: “It is correct to say that this phase has ended. However, this does not mean the super-cycle has arrived at its ‘end’: we project that trough will not occur until 2028 or 2029”.
So, there you have it: another fourteen years (at least) to go, although from beyond 2020 we should be in the last and bear phase of this cycle.
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In fact, the current super-cycle in his view is just beyond its midpoint. It is in what Fenton sees as Phase 3; Phase 1 was the recovery from the nadir of the last cycle, Phase 2 was the sharp price increases that began in 2004 and continued (with interruptions) until 2013. Now we are on the downward slope where we will see increases in spot prices, but much smaller ones than in Phase 2. But he is also saying this new phase is the second part of the bull phase, with Phase 3 bringing longer-term structure and higher spot price volatility than in any other phase of the super-cycle.
By 2024 we will be in bear Phase 4, which we won’t think about at this point.
But what the JP Morgan view does underline, and which is sometimes forgotten, is that general commodity prices have been under a great deal of pressure over the past year or two. Our minerals could not be impervious to that. Sure, the rare earth market was ridiculously (in hindsight) over-heated in 2011 and much of its subsequent retreat reflects actual physical demand (and the arrival of reality). But that retreat would have happened anyway as general commodity sentiment waned, although obviously to a far lesser degree.Potash and phosphate soared much earlier, and graphite since. What I am saying is that, regardless of factors individually influencing prices for critical materials such as REE, graphite and uranium, then the super-cycle reaching its apogee and heading into Phase 3 would have been seen a cap on their prices anyway, at least to some degree.
Meanwhile, Roger Bade at London brokers Whitman Howard has sent out his quarterly commodities update. Among his views:
Minor metals: Overall increased Chinese supplies put a dampener on minor metals prices with gallium, germanium, antimony, selenium, tellurium and tungsten all falling last quarter. Indium and tantalum fared a bit better and were roughly unchanged. “No great turnaround is expected for 2014”.
Rare Earths: Increased supplies from China, Malaysia and the U.S. kept rare earth prices on a downward trajectory. Yttrium was about the only one to show signs of stability. Recent lower-priced offers of lanthanum and cerium suggest things will remain difficult in 2014 for light rare earth prices.
Graphite: With major Canadian producer Imerys temporary closed since last August, and SGL Carbon’s cutbacks in Europe also announced, some stability has been seen, suggesting graphite prices could be bottoming. Bade says the major risk is if Syrah Resources gets going in Mozambique and adds 200,000 tonnes a year to world supply.
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