Remember the great commodities bull market of the 2000s?
Oil began it at $10 a barrel, iron ore at $10 a ton, and copper at 60 cents a pound. Gold was $250 an ounce and wheat $2.50 a bushel.
Some ten or so years later, oil was $147 a barrel, iron ore $180 a ton and copper $4.65 a pound. Gold was $1,920 an ounce and wheat reached $13.50 a bushel.
It was one heck of a bull market. But that will be nothing compared to the next one.
The two themes behind the last bull market
Bull markets need a narrative. They need a simple, persuasive, underlying story that persuades people to invest. The last bull market was built on two main themes.
First, lack of supply. It didn’t matter what the commodity was – oil, metal or agricultural produce – 20 years of the bear market had depressed prices beyond what seemed possible.
Low prices and lack of profit meant there was chronic underinvestment in the sector. Production infrastructure was old and creaky. There’d been little development of new technology, nothing was being spent on exploration, and few people were looking beyond surviving the next year. Future supply was bleak.
That was the backdrop.
The second theme was the emerging market story – China in particular. A vast population with new-found, increasing wealth, and a desire for the same things we in the West take for granted: cars on good roads, fridges with a proper electricity supply, computers and mobile phones with proper communications networks, and some meat with their veg.
This led to the mother of all infrastructure spending booms – and the so-called ‘insatiable Chinese appetite for raw materials’ story. The sheer weight of numbers meant that the Chinese demand story stayed credible for a long time.
We might not have reached the end of the bear market
Then we got the bust. Except to call it a bust is not entirely true. Sure, the fallout in energy and metals has been disastrous for production and exploration companies – all have seen their share prices decimated; many can no longer make any money. Yet more have either gone bust, or are about to.
But I would still argue that, even if the prices of commodities companies are as beaten up as they’ve ever been, the prices of the underlying commodities are not as cheap on a relative basis as they were around the turn of the century. Oil is $60 a barrel, iron ore is $60 a ton, copper is $2.60. Gold is $1,200 an ounce and wheat $4.90.
Chart-wise, they’re all in pretty clear downtrends, and could fall further. And we haven’t yet reached that moment that we came to in the 1990s where production had plummeted. Gold, for example, saw record production numbers last year.
There’s no saying, of course, that we have to reach such a moment, but that’s the backdrop.
The new Silk Road will be beyond your wildest dreams
The narrative that could drive another bull market is, again, an Asian one. It’s this new Silk Road.
The ancient Silk Road, famously travelled by Italian explorer Marco Polo, connected China and India with Persia, Arabia, East Africa and the eastern Mediterranean. Of all the goods traded, Chinese silk, it seems, was the most lucrative – hence the name.
Today, China has an ambitious vision to create a 21st century transit, trade and economic corridor from Shanghai in the east of China, stretching 8,000 miles across China, Mongolia, Russia, Poland and Belarus all the way to Berlin.
A new Silk Road.
We’re talking about roads and motorways, railways, power lines, energy distribution networks, fibre-optic cable. Cities and ports en route would also be redeveloped.
But there’s more — a ‘Maritime Silk Road’ — linking China with the Persian Gulf and the Mediterranean via the China Sea and across the Indian Ocean.
To give you an idea of the scale of this – it would cover some 4.4 billion people (the global population is seven billion) and one third of the earth’s circumference. The economic output of the region covered is $21trn, according to Zero Hedge.
The idea was first mentioned in 2013, so it’s not new, and it’s still not quite clear how it will be implemented. It is, of course, an international geopolitical minefield. But we now have the Asian International Infrastructure Bank set up, seed money in place, and close to 60 nations (including the UK) signed up to be charter members.
And governments worldwide love infrastructure projects. The sheer scale and ambition – not to mention the unprecedented amount of new trade such a project could generate, and the riches it could create – may prove irresistible.
If it happens, such a project would take decades. It would require trillions of dollars of spending. And, perhaps most enticingly of all for those of interested in commodities, unprecedented levels of raw materials.
The new Silk Road will be the narrative that underpins the next great commodity supercycle. And that supercycle will dwarf the last one.
• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.
Category: Investing in Technology