Renewable Energy and Soft Commodities

Lately, the commodities market has been a graveyard for investors, with prices at multiyear lows and no sign of any positive catalysts to turn things around. The global economic slowdown has affected goods such as steel, aluminum, copper and other commodities, and the lower demand from China is only serving to keep materials prices low for an extended period of time. The 15-year commodity super cycle culminated in a burst bubble around 2008, and has experienced a trend of depressed prices and falling demand since then. With China’s market implosion, commodities took another hit as demand fell off a cliff, with the expectation being that many commodities won’t recover for years as the world adjusts to a new paradigm without heavy Chinese demand. If we look back at the commodities cycle from 2002 to 2012, we see a high correlation between the cycle and falling demand in the Chinese markets. During that decade, China experienced high average yearly GDP growth of 10.6% and became the world’s leader of commodity imports, which helped drive up prices and boost production. If we look at the overall performance of commodities lately by tracking the S&P GSCI Commodity Index (GTX), we see how China’s decline largely is responsible for the collapse in the commodities market. Of course, not all commodities behave similarly. Oil, steel, copper, gold and silver generally are the representatives of all commodities; the “soft” commodities such as grain, corn, coffee and soybeans often are overlooked. China’s slowdown might have a lingering impact on hard commodities used for industrial purposes, but agriculture isn’t as highly correlated with China.