Only permanent supply cuts can lift metal prices
While metal prices have bounced back from last week's panicked sell-off, they are still trading at multi-year lows.
China's stock market collapse was the reason for the latest gap down, but slowing growth in the world's number two economy has been a drag on commodity prices for at least three years.
A new research note from Australia's Macquarie gives an indication of just how big the Chinese hangover is.
The investment bank and commodities trader argues there has been two capital expenditure supercycles over the last decade or more.
The upstream mining capex spree peaked in 2012 at an eye-watering $134 billion says Macquarie.
The second capex supercycle was downstream as Chinese companies added process capacity in steel, aluminum, freight and manufacturing.
The required response to the end of this cycle and stagnant demand which is "only growing into installed capacity very, very slowly" would have been to make permanent cuts to production.
But the developed world's response to the global financial crisis in the form of massive monetary stimulus has distorted the market:
"In a world of cheap money, not only is it cheaper to fund new capacity, but it is also easier to keep existing marginal assets going. Essentially, we have not let conventional economics work in this cycle — we simply have not seen enough hard decisions made by company boards or bankruptcies of uneconomic capacity," the bank said.
"All in all, it looks like a time when things have to get worse before they get better. Given the demand environment, appropriate (and permanent) supply cuts are one of the few things that would make us more positive on metals and bulk commodity prices," the bank said.
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