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Are We Entering into a Commodities Supercycle?

Delwin Graham - Aug 10, 2021
When the COVID-19 pandemic first struck, the world’s appetite for raw materials plummeted. That will happen in a worldwide lockdown. As demand fell, so did prices. Yet it was not long before they were soaring again.

When the COVID-19 pandemic first struck, the world’s appetite for raw materials plummeted. That will happen in a worldwide lockdown. As demand fell, so did prices. Yet it was not long before they were soaring again. Copper, the bellwether of the industrial metals sector, rose from a March-2020 low of US$4371 per tonne to a current US$8720. This has led some analysts to proclaim a new commodities “supercycle” – that is, a prolonged period of high prices. The idea is that the effort to “build back better” will sponsor the economic and social change that will drive long-term commodity prices. Yet in May, the price rally stumbled, giving credence to supercycle-skeptics who contend that the revival is temporary. Who is right? (Cf., “Is a Commodities Supercycle Under Way?”, www.economist.com, June 02, 2021)

Defined quite simply, commodity supercycles are decade-long periods in which commodities trade above their long-term price trend. They don’t come around that often. Going back one century, only four bona fide supercycles have been identified. Each was tied to very transformational periods of economic development: the rapid industrialization of the United States (1910s), the re-industrialization of Germany and Japan following World War II (1950s), the strong economic growth in the U.S. in the 70’s and early 80’s, and the growth of the BRIC countries (Brazil, Russia, India, and China) in the early 2000’s. (Cf., Gregor Spilker, “Are We Witnessing the Start of a New Commodities Supercycle?”, www.institutionalinvestor.com, March 22, 2021)

Looking at the most recent supercycle is instructive. Whereas the BRIC countries represented 2.6 Billion in 2000, or about 40% of the world population, a period of rapid industrialization (especially with China’s inclusion in the World Trade Organization [WTO]) drew on an unprecedented amount of commodities – metals, food, energy. The cycle continued for more than ten years, starting around the turn of the millennium and lasting well into the 2010’s. Copper rose from under US$2000 per tonne in 2000 to a record high of US$10,190 in February 2011. The commodities boom began showing signs of weakness with the great financial crisis of 2008. It finally came to a halt when the Chinese economy cooled off in 2015. (Cf., Spilker, “Are We Witnessing … ?”)

If supercycles are driven by significant structural change, then only China of the BRIC countries could be said to have matched investors’ high expectations. From 2000 to 2020, the country increased its share of world GDP from 3.6% to 16.3%, according to the World Bank. But the geopolitical climate is quite different now. At the start of the millennium, China had joined the WTO, thereby integrating the country into the world economy and fueling its demand for commodities. Now the U.S., China, and other countries are operating in a much-less-benign economic environment, where tariffs and quotas are much more likely to be used. (Cf., Spilker, “Are We Witnessing … ?”)

The question then is whether the current increase in commodity prices represents the beginning of a new supercycle or simply a typical cyclical upswing. Goldman Sachs argues that we are in a supercycle based on a post-COVID response by governments to “build back better”. Unlike the focus on financial stability that followed the 2008 global financial crisis, the coronavirus pandemic has ushered in an emphasis on job creation and environmental sustainability. “Going green” has the potential to drive the demand for commodities. For example, not only does copper play a key role in construction and the manufacturing of major appliances, it is also essential for batteries, electric cars, solar panels, and wind turbines. Of course, there are a host of other strategic commodities for the green rebuild. In addition, governments see full employment and increased income for low-income households as a key part of their post-COVID policy. Such redistribution policies are commodities-positive since lower‑income households tend to spend more of the extra money that they receive – for example, they buy a refrigerator rather than add to their investment portfolio. (Cf., Andy Home, “Goldman Proclaims the Dawn of a New Commodity Supercycle,” www.reuters.com, January 5, 2021)

On the other hand, some analysts contend that the strong performance of commodities from the COVID lows of 2020 is just a cyclical upswing driven by the huge fiscal and monetary response to the pandemic. They say it lacks the compelling structural-demand story that drove previous supercycles and that the global green-energy transformations will not emerge quickly enough to offset the impact of slowing Chinese growth where pandemic-era stimulus is already being withdrawn (Cf., Neil Hume and Emiko Terazono, “Markets Weigh Prospects of a New Commodities Supercycle,” www.ft.com, May 11, 2021). To the extent that there is a broad commodities rally, the supercycle‑skeptics contend that it will be focused on a small group of industrial metals such as copper, cobalt, and nickel, which are key to energy transition and where new projects are in short supply. But many metal analysts are looking for price weakness over the rest of this year as Chinese post-COVID growth moderates and the rest of the world struggles to catch up. (Cf., David Rosenberg, “Why the Commodity Supercycle Narrative is Overblown,” www.financialpost.com, April 30, 2021)

But that’s the thing about supercycles. They look obvious in hindsight, but they are far harder to see at the time. Please contact me at dgraham@cgf.com or 780-408-1518 for a few ways to profit in the commodities sector, whether we are entering into a new supercycle or simply looking to enjoy an upswing in prices.