The conventional wisdom for Australia’s booming, commodity driven economy says that it’s dependent on Chinese demand. That’s true to a certain extent, China accounts for 30 per cent of global commodity growth and drove the bull market.
What everybody forgets are the tight supply trends that helped commodity prices soar during the period.
Morgan Stanley is out with an interesting note taking a look at how an investment boom could result in a supply glut.
Leading off is this stat:
After a 20-year bear market in commodities, there were bottlenecks at almost every stage of the industrial commodity supply chain….. Australia’s mining export revenue, for example, increased by 585% in US$ terms in the decade to 2011. However, the volume of mining exports rose by only 42% over the same period.
Those incredible returns led to an investment boom. According to analyst Gerard Minack, this is particularly true for copper “…. the increase in global supply in each of the next seven years will be roughly equal to the increase in supply over the decade to 2011.”
Here’s Morgan Stanley’s chart on copper, which shows how slowly supply has grown since the beginning of the bull market, and and the incredible amount of new production expected by 2018:
Photo: Morgan Stanley
It would take a significant acceleration in demand for prices to stay near current levels.
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