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The ASX All Ordinaries and the Commodities Bubble.

October 5th, 2011 · Greg Atkinson · 8 Comments

Prices for hard commodities such as copper, iron ore & coal have risen strongly over the past decade and are now trading well above their long term historical averages.  This in turn drove the ASX All Ordinaries Index to a bull market high in 2007 and has helped put some support under the market ever since.  But is it realistic to expect high commodities prices will keep propping up the Australian stock market?

The answer in my opinion during the next few years is a very definite ‘no’.  I believe that many hard commodities prices are at bubble levels or at best trading near their multi-decade peaks and that the only place for them to go over the next 5 years or so is down.

Yes I know the prevailing wisdom is that China and India will keep growing strongly and this will fuel the demand for a range of commodities, but that simply sounds likes wishful thinking to me.

Europe and the U.S. will be dealing with debt issues and stumbling economies for years to come and this will (and already has) slowed global economic growth.  You simply can’t dismiss the impact of around 700 million or more consumers in developed nations cutting back on their spending.  That’s a lot of people who will consume less in the years ahead and need a lot less of what China makes.

So if my reasoning is correct and hard commodities prices fall back over the next few years what impact might have this on the Australian stock market?

Well let’s look a few charts and see if we can work that out.


The surge upwards in commodities prices from 2003/2004 can be easily seen on this chart but note how commodities prices slid backwards for most of the 1990’s. It seems many people have erased that period from their memories.

Now let’s have a look at what the Australian stock market was doing over the same time period.

ASX All Ordinaries Index (XAO) 10 year chart (Oct 2011)


The commodities boom is once again pretty easy to spot on this chart. Again it kicks-in around 2003/2004 and the ASX All Ords enjoys a solid run until the Global Financial Crisis (GFC) sends stock markets worldwide tumbling in 2008.

Initially commodities prices also tumbled but then the G-20 nations decided to try to spend their way out of trouble and this pushed up commodities prices, helped of course by a massive economic stimulus programme initiated in China.

The ASX All Ords does recover somewhat after hitting a low in 2009 but despite a surge in commodities prices it never gets close to the bull market high again. This is because a whole range of Australian listed companies especially in the financial and property areas struggled to recover after the GFC and still struggle today.  Some actually went under such as the Babcock & Brown empire for example.

The ASX All Ords chart is also interesting because we can see how the Index rose from around 1993 onwards despite commodity prices being stuck in a rut. Much of this rise was fuelled by a resurgent domestic economy so even without commodities prices rising the Australian stock market can post solid gains.

Another way to look at what influence commodities prices have had on the stock market over the last 20 years is to simply look at the BHP stock price.

BHP Billiton 20 year stock price chart (Oct 2011)


As you would probably expect the BHP chart and the RBA commodities price chart look very similar apart from drop in the BHP share price over the last few weeks which will be reflected to some extent in the next release of the chart from the RBA.  (The recent falls in commodities prices will been seen in the 4th quarter)

Clearly the market is not convinced that the commodities boom will last for decades nor are investors going along with Ken Henry’s ‘Golden Age’ theory. Hence the BHP share price has been savaged recently.

From this point forward it becomes a case of if the glass is half full or half empty. The commodities bulls will say that the current downturn is just a correction and that commodities prices will recover and remain high.

Those who think the Chinese economy is overheated and that it will significantly slow down in the years ahead probably see the glass as being half empty. When it comes to hard commodities I am a glass half empty guy.

If you look at the ASX All Ordinaries chart you can see that just before the RBA Commodities Index surged from below 80 the All Ords was around 4000 and I have marked that level on the chart below.

ASX All Ordinaries Index 20 year chart with trend (Oct 2011)


So roughly speaking the boom part of the commodities cycle helped push the All Ords past 4000 and ahead of the long term trend (also marked on the chart) up until the slump in 2008.  The All Ords then fell back to a low in early 2009  and then commodities prices got a push back up and the market moved back up to around 5000 points.

So I don’t think it is unreasonable to suggest that in an era of lower commodities prices the ASX All Ords will need to work from a base of around 4000 – 4400. This takes into account that other areas of the Australian economy are struggling and the continued confusion over the mining tax, carbon tax etc.

But of course this reasoning would fall apart if commodities prices were to drop all the way back below pre-boom levels.  However if that looked like happening you can be sure the Reserve Bank would cut rates pretty swiftly and this is likely to give the stock market a boost…hopefully…maybe.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp

8 responses so far ↓

  • 1 Robert Jobson // Oct 5, 2011 at 7:02 pm

    Nice post, My adviser Paul Hodson has done a similar post (see:

  • 2 Biker // Oct 6, 2011 at 6:45 am

    Hodson: “…to highlight the relative safety offered by having diversification (spread) of investments, rather than trying to pick ‘the’ one to invest in.”

    Good to see diversification ‘coming back into style’.

    Over at DRA, we see a similar drift, as contrarians come to terms with failed bets. Harry Browne is back in towne… !

    Half full? Half empty? Give me a full glass anytime!~ 😉

  • 3 Greg Atkinson // Oct 6, 2011 at 8:59 am

    I was not aware that portfolio diversification ever went out of style.

  • 4 Biker // Oct 6, 2011 at 12:52 pm

    The very idea sounds contrary, doesn’t it?

    I accept that you have PMs, property, cash and Super, Greg.
    A lotta people don’t. 🙂

  • 5 Ross T // Oct 8, 2011 at 9:25 am

    If the RBA overlayed the US (and maybe the European) debt ceiling on the commodity prices graph you presented above it should show that all the graphs are very similar. You can also do the same for gold.

    Conclusion – whilst countries keep printing paper money to deflate their value in trade wars the value of commodities will continue to rise. Inturn the finance industry needs high commodity prices to live off (real estate has gone out of fashion-temporarily), so although your conclusions are sound a huge financial mistake is needed to break the current state of affairs.
    Maybe a tax on firewood would save the australian economy? – A fiscal boost from Tasmania, lots of employment, no CO2, unhappy Bob – real win-win scenario;)

  • 6 Greg Atkinson // Oct 8, 2011 at 9:55 am

    Good points Ross. My other concern is that I reckon the chances of all the new mining capacity scheduled to come online over the next decade and demand being matched is pretty slim.

    If the commodities cycles follows the script then the rush to bring on extra capacity at the top of the cycle will be matched by the rush to slash capacity when the cycle turns downwards. Not only would that hit the Australian economy because commodities prices would fall but also because new mining projects would be shelved. (and all that inward investment we are counting on would dry up)

    Perhaps it is hard commodities and not gold that is the ultimate asset bubble?

  • 7 Brian L // Oct 9, 2011 at 2:54 pm

    The BDI continues to rise and has now hit 2000, so is this now a reliable leading indicator as it has been in the past?

  • 8 Greg Atkinson // Oct 9, 2011 at 6:46 pm

    Brian at this stage I think we still need to be cautious about the BDI as the shipping sector is still dealing with a lot of post boom issues. I suspect that ‘slow steaming’ for example might be playing a part in taking some capacity out of the system and there are still a lot of ships laid up or destined for the scrapyards.

    Having said that, the BDI did give us a warning that the markets were due to head down and it was showing weakness well before the IMF started talking about a global economic slowdown so I reckon that’s 1-0 to the BDI this year.

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