A commodity supercycle is an extended boom and bust period in commodities with prices rising or falling significantly above or below their usual trends. Supercycles can last for long periods of time and including over several years and even over a decade.
What’s driving the commodity cycle?
Commodities have achieved strong price gains recently. This has prompted speculation that we could be in the early stages of a so-called supercycle; a sustained period of growing demand exceeding supply.
Global commodity prices have been moving higher in the past few months. This is partly due to geopolitical issues including Russia’s invasion of Ukraine.
As the war between Russia and Ukraine continues to escalate, global commodities markets are experiencing the biggest upheaval since the 1973 oil embargo on the United States.
However, this time the energy crisis is most acute in Europe, which relies more heavily on Russian exports. The repercussions of its invasion seem to have changed global supply chains overnight. This is because Russia is the second largest commodity producer in the world behind the US.
A mismatch of demand and supply has also affected prices. However, despite robust demand for commodities, producers have been reluctant to increase supply. This is adding further pressure on prices.
Commodities also had a good run in 2021 according to a report in October by the World Bank.
During 2021, metal prices rose 48%. Natural gas and coal prices also reached record highs – the former rising by 69% in Q3 and the latter by 44%. And agricultural products saw a 22% rise over the same period.
Commodity supercycle & Covid-19
The price surge was driven by the post-pandemic recovery and growing demand for green infrastructure (batteries and raw materials for electric vehicles), although the report also highlighted the impact of increasing urbanisation on commodity demand.
Oil prices also soared over 300% from its lows in April 2020 (oil technically went negative as buyers needed to take delivery of each barrel in Oklahama) , and the global commodity index (S&P GSCI) has more than doubled in value along with other assets.
So, are we currently experiencing a global commodity supercycle? Or are the recent price rises just a consequence of supply interruptions and other shocks?
Four commodity supercycles since early 1900s
Research from the Bank of Canada identifies four bull supercycles in commodity markets since the 1900s. Each of these saw the Commodity Price Index deviate by at least 10% from its long-term trend.
Looking back at these could help shed some light on what causes commodity supercycles.
Although the cause of each supercycle was different, Bank of Canada research found a common driver. This was the interaction of large, unexpected demand shocks and slow-moving supply responses.
According to the paper, the supercycles coincide with the following transformational periods:
- The first supercycle coincided with the industrialisation of the US in the early 1900s
- The second supercycle coincided with pre-Second World War rearmament
- The third supercycle with the reindustrialisation of Europe and Japan in the post-war period.
- The last recorded commodity price supercycle was driven by a series of important reforms that supercharged Chinese economic growth. This includes accession to the World Trade Organisation (WTO) in 2001.
Is there a commodity supercycle in 2022?
There is much debate about whether 2022 hails the beginning of a new supercycle or just a brief bull market.
In 2021, the prices of metals, gas, coal and agricultural products soared. Lithium for EVs is now also in demand as we go through the electrification phase. Iron ore and cobalt will also be required in huge amounts, as well as the building of new wind turbines, in what could fuel a commodity boom. According to Goldman Sachs Analyst Jan Hatzius, 2021’s gains signalled the beginning of a 10-year commodities supercycle and not just a one-off surge.
It appears that two key factors appear to be driving the current supercycle:
The global recovery from the Covid-19 pandemic
The post-pandemic recovery has contributed to growing prices, especially in the energy sector. This is according to Laith Khalaf, head of investment analysis at AJ Bell
Khalaf explained to Capital.com that there has been a cyclical upswing in the price of some commodities as the global economy has recovered from the depths of the pandemic with sky-high energy prices making the headlines.
The modernising of infrastructure
The economic reawakening is also compounded by governments investing heavily in green infrastructure, which directly impacts on commodity prices.
Khalaf goes on to say that looking forward, there may be reasons beyond an economic upswing that prompt higher commodity prices. This is attributed notably to government spending in infrastructure and the shift to green forms of energy and transport.
Demand for green infrastructure set to drive the next supercycle
The demand for green infrastructure is set to drive the next supercycle. According to Tom Stevenson, Investment Director at Fidelity International, the demand for certain ‘green metals’ like copper, nickel, aluminium, and platinum is expected to soar.
Years of low investment also mean that the supply of some metals is too low to meet demand, putting further upward pressure on prices.
“Of the more than 200 big copper deposits to have been found in the past three decades, only a handful have come in the past 10 years… It takes years to develop a copper mine and in recent years, shareholders have encouraged the payment of dividends over-preparing for a future boom,” Stevenson said.
Yet markets for metals continue to experience asymmetric impacts from market news.
Supercycle or short-term price fluctuations?
As supercycles typically last for 15–20 years, it can be difficult initially to distinguish between the start of a new commodity price supercycle and more ordinary short-term price fluctuations. It remains to be seen whether commodity prices will hold consistently above long-term averages.
There is also some uncertainty about whether global post-Covid business reopening and green investments are strong-enough forces to drive another supercycle.
Research from Marquette Associates suggests that today’s drivers may not be strong enough.
According to Piero Cingari, an analyst with Capital.com “Our research shows that the current commodities supercycle has already produced returns equivalent to the previous supercycle’s mature times. This is true for the majority of energy commodities, such as oil and grain, whereas metals, like gold, have been absent from the supercycle thus far.
Cingari goes on to say that” The fundamental difference between now and 2002 is that, following the brief post-Covid parenthesis of around two years, commodity prices are mostly sustained by supply disruptions while the forecast for demand begins to deteriorate amid rising recessionary risks.”
How can investors profit from the commodity supercycle?
According to Tom Stevenson from Fidelity, there are three ways to invest in a commodity supercycle, as follows:
- Investing in the producers of energy and metals. In an inflationary environment, miners and the oil majors have the additional merit of offering investors a high and sustainable dividend income.
- Investing in the commodities themselves. The easiest way to access these is through an exchange traded fund (ETF) that tracks either a single resource or, better still, a basket of them to diversify away some of the volatility inherent in commodity investing.
- By considering the picks and shovels investments that stand to benefit from the requirement to produce more stuff, at a lower cost, and to distribute it more widely. John Deere, a pioneer in agricultural automation is touted as the Tesla of Farming according to David Coombs, a fund manager at Rathbones whose lateral thinking on natural resources led to the discovery.
Three top stocks worth investing in
There are three top stocks that should be in your commodity basket according to Goldman Sachs analyst Jan Hatzius – Glencore, Diamondback Energy and Steel Dynamics.
However, I ignore the advice of all analysts and do my own research using SharePad. You can claim a free month worth £74 on me here.
Commodity supercycle and recession fears
According to S&P, energy, metals and agriculture prices have all tumbled from their March peak on inflationary recession fears, amid a slew of economic warning signs. However, a commodity bust is far from inevitable.
And JP Morgan believes a new commodity supercycle could underpin a secular shift in the global economy, and an equally seismic rotation in equity markets from growth towards value companies.
Investors should tread carefully as commodity prices can be expected to continue to be volatile.
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