On the cusp of a commodities supercycle

On the cusp of a commodities supercycle

We’ve heard the term ‘supercycle’ being tossed around a lot as of late. In the commodities industry, it’s generally being considered more and more likely that we find ourselves on the cusp of a commodities supercycle. But what does this actually mean? This article explores the definition and history of supercycles and what we can expect from this latest, upcoming one.  

When the pandemic first hit, demand for metals and raw materials of all kinds plummeted. Projects that were underway grinded to a halt. Now, with the economy opening back up again across the world, demand for these materials is steadily creeping back up. Furthermore, large, expensive infrastructure projects are in the planning stages in countries like China and the United States. This is all contributing to the advent of a new commodities supercycle.  

What is a supercycle? 

There is no agreed definition of a supercycle, but there are a few defining characteristics. A supercycle is a prolonged period of high prices that rises above the long-term trend. How high these prices go isn’t necessarily stipulated, but a common benchmark is triple of normal rates. Some say that a supercycle lasts between 10 and 35 years, but others say a minimum of 5. Either way, during a supercycle, suppliers usually struggle to match demand.  

There have been four recorded instances of sustained periods of such growth in history. The last one, well-documented, was the rapid industrialization of China in the early 2000s. That period in time saw the country invest in national projects which sent demand for raw materials skyrocketing.  

The post-coronavirus supercycle of 2021 

The COVID-19 pandemic has ushered in this new era of commodity-intensive growth. Governments are now placing greater emphasis on the creation of jobs, as well as environmental sustainability. This contrasts with the last time we left a global financial crisis, in 2009, when recovery focused exclusively on financial stability. 

Metals and certain agricultural commodities (namely soybean and corn) jumped in May, continuing the steady uptick in commodities that has been occurring since February of this year. Iron core hit record highs last month as well. There are a number of contributing factors to this. The biggest one is the post-pandemic economic recovery in Europe, but we’re also seeing strong Chinese demand for such commodities. All of this is to be expected considering the number of revitalized projects that were placed on hold during 2020. 

But this supercycle is also marked by a huge shift towards renewables and ‘green metals.’ According to Tal Lomnitzer from Janus Henderson, “We see potential for a multi-decade commodity cycle ahead driven by decarbonisation of the global economy and shift to cleaner energy.” Indeed, it does seem like we can expect demand for green metals to soar, but supply is already constrained. Demand is set to accelerate even further as the world shifts towards more sustainable energy solutions. For example, decarbonizing initiatives such as electric vehicles require copious amounts of copper. Aluminium is also set to do well here. According to the International Energy Agency, in order to achieve net zero emissions by 2050, the market size of several minerals like copper, cobalt, and manganese will have to grow sevenfold.  

Will it last? 

Some are denying whether or not we actually are on the brink of a supercycle, or whether this is simply a commodities ‘boom’. At the very end of May, hedge fund bets began to fall. Demand for natural gas has plateaued slightly as the weather in the U.S. has proven profitable for crops. Additionally, oil markets are readying themselves for larger supplies. This indicates that for some commodities at least, growth is beginning to slow. However, green metals do not currently show any signs of slowing. Whether or not the commodities ‘boom’ will indeed develop into a supercycle remains to be seen, but as it currently stands, it looks like a resounding yes.  

by Brad Knoxview my profile

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