The Rising Influence of Rising Affluence

[DewDiligence]

Re: Is the bull market in commodities over?

There's a long lag before supply responds to increasing prices and demand, which means that the system by its nature is very prone to overshooting. We've had enough years of higher prices for a lot of new supply to come on-line now, and I'm guessing it's time for the overshoot to happen.

I presume you mean that it’s time for the undershoot—i.e. the overshoot on the downside—to begin.

Perhaps; however, for many commodities such as iron ore that tend toward megaprojects, elapsed time per se is generally not the main driver of increasing supply in response to higher prices. Rather, there are substantial financial, environmental, and political impediments to project development even when the raw material itself is relatively abundant. For instance, VALE has been negotiating with the government of Brazil for what seems like half a lifetime to expand its iron-ore output in regions of the country where mining is already entrenched.

Moreover, contrary to the ordinary meaning of the word commodity, quality matters a lot in some commodity markets, so increased supply may not have as simple an effect on pricing as one might assume. (This was discussed in a thread a few months ago culminating in #msg-73414315.)

So, what does all this mean for such stocks as CLF, VALE, and HES? Are they now unduly cheap even if commodity prices do retreat to some degree? I would submit that they are, but I’ve been getting killed on these names lately.