Macquarie Research says the collapse in the global economy over the past three months has “taken the world by surprise, leading to carnage in the pricing of most commodities as demand has collapsed in virtually every significant consuming market globally. With demand in China showing clear signs of slowing sharply, any suggestion of ‘decoupling’ has disappeared and the supercycle in commodities is now on hold until global growth reaccelerates. Our views are based on the belief that economic growth (and therefore metals demand growth) will be picking up in late 2009/early 2010.”

In most cases, Macquarie’s forecasts point to large surpluses in 2009, but much smaller surpluses in 2010. By 2011/12, Macquarie believes that there is a high risk that the main commodity markets will be back in significant deficit again. The collapse in prices during the second half of 2008 is making it extremely difficult for producers to justify building new capacity. Together with the credit crisis, this is also making it extremely hard for smaller producers to secure the financing required to bring planned projects into production.

The only positive Macquarie says it can find right now is that “producers have reacted quickly to the collapse in demand, and production cuts are coming through thick and fast. This is not eliminating the surplus threat, but is at least preventing the surpluses from being much, much worse.

“For the next year, with all the main commodities expected to be in significant surplus, our main focus is on the cost curves, and particularly how low prices have typically traded in periods of oversupply. Until tightness returns (late 2010 at the earliest, in our view), we believe it will be the producer reaction (driven by prices vs costs) that will set the floor for the metals.

“There have already been several examples of producers delaying planned expansions in response to the slump in prices and tightening credit availability, and we expect to see many more project delays and even cancellations in the coming months. We have reassessed our longer-term supply projections in the light of likely financing difficulties and have slashed our production projections from 2010 onwards. As long as we are starting to see some demand recovery, this should set the scene for a strong rebound in prices and the second leg of the commodity bull market. Some time in 2010 or early 2011, we expect to be able to withdraw our force majeure declaration on the supercycle!