Elevated view of freight cars with coal © Joseph Sohm-Visions of America-Photodisc-Getty Images

There is no free lunch.

So, yes, the flood of cash from the world's central banks prevented the crash of the world financial system in the dark days after the collapse of Lehman Brothers and the near collapse of America International Group (AIG) and Citigroup (C). And, yes, European Central Bank President Mario Draghi's promise to do anything necessary to save the euro has headed off the collapse of the market for Italian and Spanish government bonds. And yes, the huge stimulus thrown at China's economy prevented a hard landing, where the nation's growth rate might have slipped below 7%. And, yes, the Federal Reserve's promise to keep interest rates at essentially 0% has revived, finally, the U.S. housing sector.

But we're still counting up the costs.

Sometimes the price is obvious: In China it produced a real estate bubble that has littered the landscape with ghost cities of apartments owned by speculators.

Sometimes the price is obvious but delayed: Someday the bill will come due in higher inflation, higher interest rates and weaker currencies.

And sometimes the price is just not all that obvious. That's the case right now in the commodities sector, where a global policy of cheap money has turned a modest slump into what looks likely to be a long, deep, depression in the worst-hit sectors, such as natural gas, coal and maybe even iron ore.

How is cheap money related to what is already a punishing recession for major commodity sectors? Let me explain.

Because if you buy my explanation of the cheap money/commodity recession connection, I think you'll wind up rethinking your strategy and timetable for investing in commodity stocks.

image: Jim Jubak

Jim Jubak

Boom and bust

Let's begin with the mismatch between what I'm calling the commodity depression and the slowdown in global growth. Certainly the slowdown in China's economy -- the driver for the global market in commodities,  from thermal coal to copper to iron ore -- should lead to a drop in commodity prices from their peaks.

A China growing at 10.4% in 2010, thanks to the country's post-global financial crisis stimulus efforts (let alone a China growing at the 12% or 14% annual rate before the financial crisis), would consume more coal, iron ore, copper, oil, etc. than a China growing at 7.8%, as the country's economy did in 2012.

Take a look at iron ore, for example. China's steel mills are the world's largest consumer of iron ore (accounting for 60% of global iron ore imports), and it makes sense that demand from China would slow as China's growth rate hovers near 8% rather 10% or 12%. In fact, Goldman Sachs projects that China's imports of iron ore in 2013 will grow at the slowest rate in the past three years.

But do note that China's demand for imports of iron ore is still projected to grow in 2013 -- by 4%. And global demand for iron ore imports is expected to grow by 8% this year.

Iron ore prices, however, have already retreated 6% this year. And the consensus among analysts surveyed by Bloomberg projects that iron ore prices will fall an additional 34% to finish the year near $90 a metric ton. (Iron ore sold for about $155 a metric ton at its local peak at the end of February 2013.)

That may not even be the worst news. Iron ore prices could continue to retreat through 2014 and perhaps until 2018, according to Morgan Stanley. That would produce a slump that mirrors the nine-year boom that saw iron ore prices climb sevenfold from the late '90s, when the price was $15 to $20 a metric ton.

Prices down, demand up

Projections for a huge decline in price by the end of this year and in the years ahead don't make much sense if you look just at the demand side of the market, however. 

Demand from China for imports will climb 4% in 2013 and yet the price of iron ore will not just slide lower, but plunge? Global demand will climb by 8% but prices will fall an additional 34% in 2013?

Ahh, take a look at the supply side. Those same projections that say global demand will rise by 8% in 2013 also call for a 9.1% increase in seaborne supply (the standard term for global iron ore imports since iron ore travels from mine to customer by sea).

And that's just the beginning of a trend that has supply growth outstripping demand growth as new iron ore capacity comes on line. Morgan Stanley projects that the global iron ore market will move into surplus in 2014 and that the surplus will continue to grow through 2018. That's won't be good for prices.

This basic story -- slowing but still solid growth in demand overwhelmed by a big increase in supply -- isn't limited to iron ore. The same holds -- with individual wrinkles for specific commodity markets -- for commodities as diverse as natural gas, thermal coal and copper.

Copper, for example, is projected to move into a global surplus in 2013 as demand rises by 5.3% but supply rises by 6.8% to 8%, according to analysts.

That will take copper to a projected surplus of supply over demand of 330,000 tons in 2013 from a deficit of 95,000 tons in 2012 and 132,000 tons in 2011. Copper for delivery in three months closed at $7,958 a ton on April 3. The average price for 2013, according to Goldman Sachs, will be $8,458 a ton before falling to $7,250 a ton in 2014.

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This pattern of boom to bust and then back (commodity investors hope) to boom is typical of the commodities sector. High prices lead producers to increase their capital budgets and invest in new capacity. But it takes so long to find and develop these resources that the result is often over-investment in new capacity, as every mining company invests in new capacity that then yields a temporary surplus in the sector, driving down prices.

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