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Goldman forecasts lower commodity prices as super cycle ends

According to Goldman Sachs Group Inc, commodities from iron ore to copper and Brent crude will drop over the next five years as global supplies climb.

There will be substantial declines in some metals, energy and bulk commodities, analysts including Chief Currency Strategist Robin Brooks wrote in a report. The period of continued YoY price rises for most commodities is over.

Banks from Citigroup Inc to Deutsche Bank AG have called an end to the commodities super cycle, when China’s surging demand combined with supply constraints to more than double prices in the 12 years through 2010. Raw materials rallied this year from three annual losses as a lack of rain in Brazil lifted coffee and a ban of ore exports from Indonesia spurred a rally in nickel. The drop in energy prices since last month showed the impact of higher global output, Goldman said in the report.

The analysts said that a prolonged period of elevated commodity prices has catalysed a supply response. We do not expect a collapse in global commodity prices. But we do anticipate substantial declines.

The Bloomberg Commodity Index of 22 raw materials climbed 3.4% this year. That compares with a 0.9% drop in the Bloomberg Dollar Spot Index and 5.3% advance in the MSCI All Country World Index of equities.

Iron ore entered a bear market in March on prospects for a glut as supplies surged. Rio Tinto Group, the world’s second largest mining company, said iron ore production in the three months to June gained 11% while Fortescue Metals Group Ltd said its shipments were 57% higher on year.

The Goldman analysts said that “We remain bearish on iron ore, and expect a surplus market to drive the longer-term price down. We see limited upside for agricultural commodities over the longer run.”

Deutsche Bank said last month commodity prices will remain subdued for years as many of the factors and fears that drove the super cycle have dissipated. Citigroup said in April 2013 that death bells would ring for the commodity super cycle.

Source – Bloomberg


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