The Commodity Y2K Cycle

Having lived through the Y2K and internet-inspired bubble, it was only after that we realized the “pull forward” of normalized IT spending is what helped drive such tremendous revenue growth numbers for many of the client/server software companies the likes of SAP, Oracle, Microsoft, PeopleSoft, Siebel, and dozens of others. While most (myself included) misread this as an accelerated secular trend, we failed to adjust for the cyclical element of spending.  Obviously obscuring that the internet adoption, which in parallel caused a parallel infrastructure investment that touched almost every part of life.

Last year Bill Gates cited that the Chinese consumed more concrete in a 3-year period between 2011 and 2013 (6.6 gigatons) than the US did during the entire 20th Century (4.5 gigatons) when the US built the interstate highway system, airports, major cities and most of our current physical infrastructure. 

We are seeing plunging commodity prices today due to an imbalance of supply and demand.  The parallels to Y2K seem to be there.  A massive stimulatory infrastructure investment for China may well have pulled forward 10-20 years of the building cycle, and the commodity demand as part of the commodity super cycle.  Global capacity adjusted accordingly to meet peak demand – be it bricks, mortar, copper, oil, steel, iron, or aluminum.   Unlike the IT industry, however, the modest innovation in commodities is unlikely to unleash another cycle of investment by itself as we have seen in the mobile industry.

Capital spending, already being reduced by technology fueling the “shared economy”,  is likely to be front-and-center as the part of the global economy impacted disproportionately over the next 5-10 years as was the case in the IT industry post the 2000 bust.  The big difference in the accentuated IT spending cycle of the late 90’s was that the software vendors engineered enduring revenue streams into their business model which constitutes more than half of all the revenue for these large legacy vendors today, which helps them stockpile cash, consolidate the industry and slowly transform their business models.   The high yield markets are not signalling they expect this same graceful transition for the commodity producers today.