Commodity cycle ‘closer to the end than the start’

Commodity cycle ‘closer to the end than the start’

It's too early to call the end of the current commodities cycle as a whole, according to Henderson Global Investors – but some sectors have bottomed out already.


In a note to investors, titled Global commodities correction: Are we there yet?, Henderson co-head of global commodities and managed futures Mathew Kaleel pointed to the Bloomberg Commodity Index, which has fallen by 55 per cent since April 2011.

"This is one of the longer and deeper pullbacks we have seen. The correction in commodity prices has been across a broad range of commodities and quite a consistent downward trend," Mr Kaleel said.

But the bottom of the cycle will be hard to call, he said – noting that any "broad bottom" in resource stocks will come about via "self-imposed supply discipline" from the majority of producers.

That said, at current spot prices large parts of the resources are not viable over the medium term – with 20 to 30 per cent of global coal and iron ore producers struggling to break even.

At US$40 a barrel, current oil prices are also too low for Organization of the Petroleum Exporting Countries (OPEC) producers to make money. In the US, oil prices cannot sustain new investment in shale oil production, according to Mr Kaleel.

On the other hand, Australian gold stocks appear to have hit the bottom of the cycle in 2013, he said.

"With costs denominated in Australian dollars and revenue in US dollars, the healthier constituents of the gold sector should do relatively well," Mr Kaleel said.

"Conversely, iron ore producers seem to have little respite for the foreseeable future. This signifies that the resources boom is definitely over for parts of the sector, but for those that seemed to have bottomed out already, opportunities should start to present for active stock selection," he added.

"We are not at the [bottom] yet, but we are much closer to the end than the start. On a medium-term time horizon, risk reward opportunities are now becoming evident in both broader commodity pricing and parts of the resource space."

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Commodity cycle ‘closer to the end than the start’
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