Death of the Commodity ‘Supercycle’ is This Year: Citigroup

By Brendan Conway

Well, that headline got your attention. As Citigroup’s Edward L. Morse, Heath R. Jansen and three colleagues must have intended.
The firm’s note “The End of the Commodities Supercycle” this week predicts that the boom time is over this year for metals, oil and other key commodities. Citi predicts a return to normalcy starting this year — meaning commodity prices reflect the ups and downs of specific markets. That’s opposed to the persistent gains that China’s growth — now slowing — created in commodities:

The downward shift in China’s economic growth rate combined with the decline in the commodity intensity of growth have a permanent and profound impact on global markets. China has reached a new phase, less focused on infrastructure and urbanization, both of which are highly commodity intensive. Lower single-digit economic growth shifting to a greater emphasis on consumption rather than investment hits industrial metals, bulk commodities and to a lesser degree energy demand.

What happens from here, per the Citi analysts, should very much reflect supply and demand factors in individual commodities:

The first quarter provided a clear precursor of what’s likely to come – the majority of commodities saw prices fall across the board, and those that rose did so for commodity-specific reasons: US natural gas brought the highest returns of any commodity for the first time in a half decade on the temporary stall in production growth and a measurably colder winter, ending 1Q with a solid month of unusual residential/commercial and power demand; cotton prices rose sharply as well, partly in response to the 18% drop in 2012 but largely on the basis of uncertainty about Chinese buying ahead of reduced plantings; US gasoline rose to record winter levels largely as the residual impacts of 2012’s shuttering of Atlantic Basin refining, a significant collapse in Venezuela’s refining system (which turned the country from being a structurally long exporter to a structurally short importer of the key transportation fuels), and of course because of the devastation of Hurricane Sandy on the US East Coast; and US-based WTI was finally a winner due to de-bottlenecking of logistic systems in the US while waterborne crude stream markets remained firm.

PowerShares DB Commodity Index Fund (DBC) is down about 5% this year. Several individual commodities are already technically in a bear market or have spent recent stretches in one. SPDR Gold Trust (GLD) is down more than 17% on the year and iShares Silver Trust (SLV) is down by nearly 26%. Oil prices are up more than 5% on the year, helping United States Oil Fund (USO) fight the futures curve with a rise of more than 2% YTD.
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