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Finance Professor Pettis: Prices of Hard Commodities Will Collapse by 2015

By    |   Tuesday, 18 Sep 2012 08:06 AM

Hard commodity prices will continue to fall and by 2015 they will completely collapse, Michael Pettis, a finance professor at Peking University, predicts.

Pettis outlines four reasons for his bearish views on hard commodities in an article for Business Insider.

First, he says, commodity markets are facing a glut of supply. Producers scrambled to catch up to a surge in demand over the past decade. However, because of the long delay between planning and getting supply on the market, we'll continue to see a rapid supply growth for years.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Second, economic growth in China, the source of most of the demand for commodities, will continue to slow over the next few years, Pettis writes.

Third, China will transition to more sustainable, less commodity-intensive growth, according to Pettis. Even if it somehow returns to 10 percent annual growth, this rebalanced economy will require smaller amounts of hard commodities.

Finally, the recent boom in Chinese commodity purchases has created inventory levels that are far too large for its future growth, so China might actually become net sellers of some commodities.

"Prices may have dropped substantially from their peaks during this time, but I don't think the bear market is over. I think we still have a very long way to go," writes Pettis.

Most economists have scaled back their predictions for Chinese economic growth for the next decade to 5 to 7 percent from 8 to 10 percent.

"But the historical precedents suggest we should be wary even of these lower estimates," he warns. "Throughout the last 100 years, countries that have enjoyed investment-driven growth miracles have always had much more difficult adjustments than even the greatest skeptics had predicted."

Experts expected economies of Brazil, Japan and the USSR would slow after periods of fast growth, but few predicted their negative growth or the USSR's economic collapse, Pettis notes.

Australia’s Resources Minister Martin Ferguson agrees that the boom in commodity prices is over.

“The easy earnings we get out of high prices are now gone,” Ferguson told Bloomberg TV.

“We have to accept that here on in it’s going to be a lot of hard work to actually expand capacity rather than rely on increases in prices."

Australia has relied on commodity exports to China to boost its economy, but mining companies like BHP Billiton Ltd. and Fortescue Metals Group Ltd. have recently delayed projects and cut employees, Bloomberg reports.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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Hard commodity prices will continue to fall and by 2015 they will completely collapse, Michael Pettis, a finance professor at Peking University, predicts.
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Tuesday, 18 Sep 2012 08:06 AM
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