Macro Wrap – Ahead of $AA Earnings, End of Commodity Bull Market?

by Enis April 8, 2013 7:53 am • Commentary

Alcoa kicks off earnings season after the close today, though its significance on the broader market is negligible given that it’s only a $9 billion market cap aluminum company.  Not exactly a driver of economic growth.

But I am focused on the potential end of the long-term commodity bull market.  Since 2002, almost all commodities have had an incredible run of strength, led by insatiable Chinese demand.  China has gradually become the largest consumer of most globally traded commodities, best illustrated by this chart from the IMF:

Screen Shot 2013-04-08 at 7.42.17 AM



China is 20-50% of global consumption for a wide range of commodities.  Its impact has been felt most strongly in the industrial base metals complex, since copper, aluminum, iron ore, and steel have been necessary inputs into China’s massive building boom.  The past 18 months, though, has seen a major dropoff in prices for those commodities as Chinese building growth has slowed.

This dropoff has also been reflected by weakness in commodity-producing countries’ equity markets (a theme I highlighted last month).  Much of emerging market asset growth was driven by Chinese demand for commodities, so we have started to see emerging market asset deflation (mainly in producing countries) as that demand slows and supply continues to grow.

The weakness in gold and silver despite new easing programs from the Fed and the BoJ over the last 6 months might signal that commodities as an alternative asset class have lost their luster.  Precious metals are much less affected by the industrial developments in China, but investor psychology regarding commodities as a whole has potentially changed.  The 10 year commodity bull run might be at an end, record-low interest rates or not.