Greenworld Investor has a piece on the debate between Michael Pettis and Jeremy Grantham on where we are in the commodity cycle:

“Two of the most respected market analysts have radically opposite positions on where the commodity cycle is right now. While Michael Pettis thinks that the commodity cycle has peaked and hard commodities will crash by 2015, Grantham thinks there has been a paradigm change in commodities which will keep on increasing in price.

Pettis’s Arguments are based on:

a) First, during the last decade commodity producers were caught by surprise by the surge in demand. Their belated response was to ramp up production dramatically, but since there is a long lead-time between intention and supply, for the next several years we will continue to experience rapid growth in supply.

b) Second, almost all the increase in demand in the past twenty years, which in practice occurred mostly in the past decade, can be explained as the consequence of the incredibly unbalanced growth process in China.

c) Third, and more importantly, as China’s economy re-balances towards a much more sustainable form of growth, this will automatically make Chinese growth much less commodity intensive

d) Surging Chinese hard commodity purchases in the past few years supplied, not just growing domestic needs but also rapidly growing inventory.

Grantham Thesis on Commodities

Global Commodity Parabolic Price Rise Bubble or Real- Is it Really Different This Time

The rise in global commodity prices is fueling inflation everywhere particularly in developing countries where food and energy forms a major percentage of the inflation basket. This has forced countries like India and China to accelerate interest rate hikes to cool down inflation. Rising Food Prices has caused distress in a number of places leading to food riots in Africa and have been said to be a leading cause of the revolutions in the Middle East. Oil Prices continues to increase unabated as dollar decreases with US Money Printing. Commodities are touching new all time peaks as rising global demand, finite resources, money printing by developed countries fuel price hikes. Silver has been increasing in a parabolic manner with other commodities too showing heart-stopping jumps in prices. The rise in global wheat,rice prices has been at a record as well. Almost all commodities have seen sharp prices increase.

Grantham has made a famous call

The rise in commodities is not a cyclical phenomenon but a secular long term one. He says that the rise in commodity prices is different from the past. Note Grantham has done an extensive study of bubbles and is one of the leading minds in the investment community. While every time in the past, the statement “this time is different” has led to a crash, Grantham’s call cannot be taken lightly. He says that the rise in population, shortage of resources, the growing consumption power of massive chunks of prosperous citizens in India and China will lead to a continued surge. Note commodity prices have declined secularly in the last century and since 2000 have managed to erase all their losses to form new peaks. Grantham also says there is a possibility of a massive short term decline which will give a historic opportunity to load on commodities. Jim Rogers is the most famous commodity bull and now Grantham has joined him.”