A commodity supercycle is a decade-long period in which a commodity trades above its long-term price trend. Some market analysts are seeing signs that a new supercycle is starting now, pointing to a weak dollar and supportive central bank and fiscal stimulus geared towards infrastructure spending and renewable energy.
The final supercycle can be summed up in one word: BRIC. Brazil, Russia, India and China represented 2.6 billion people in 2000, or about 40% of the world’s population. The idea is that the BRIC countries are on a path of rapid industrialization, which will require unprecedented amounts of raw materials, food and energy commodities. The cycle continued for more than 10 years, starting around the turn of the millennium and continuing into the 2010s. The commodity boom began to show signs of slowing down when the major financial crisis and subsequent Euro crisis rocked markets in 2008 and 2011. It finally stalled when China’s economy cooled in 2015.
The last Supercycle was supported by the US dollar which continued to erode. The currency has been on a depreciating path since the bursting of the dot-com bubble in 2001. It hit a record low just as oil prices hit an all-time high in the summer of 2008. Since then, the US dollar has been appreciating until the spread of Covid-19 in March 2020 .
Why is it weak now? The Federal Reserve has joined other central banks in the zero interest rate policy (“ZIRP”) club as it has pulled all the levers to support the US economy. Mechanically, a weak dollar often pushes commodity prices higher. Raw materials are almost always priced in US dollars, so producers often need to adjust prices upwards to offset higher production costs in local currencies. And on the demand side, a lower US dollar means that, all in all, commodities are becoming cheaper for the importing country, leading to higher demand.
Since the great financial crisis, inflation has been most prominent in its absence. This is despite the many warnings that quantitative easing and zero interest rates could lead prices to spiral out of control. Central bankers have also signaled that higher-than-average inflation does not necessarily result in an immediate rate hike.
The supercycle idea is further supported by pent-up demand that can be released once the economy reopens. And many believe that the government will not adhere to the same austerity policies they implemented after the great financial crisis. Government spending is one of the main pillars supporting the supercycle hypothesis.
In the European Union, the fiscal stimulus package of 1.8 trillion Euros comes in green, with 30% dedicated to fighting climate change. In the US, the Biden administration is preparing a potential $3 trillion bill devoted to infrastructure and climate change projects.
The private sector followed suit, with automakers in America and Europe pledging to stop building vehicles with internal combustion engines by 2030 or 2035. It is likely that further commitments will be made in the months leading up to COP26, the United Nations’ annual event. Climate Change Conference. The event will be held in Glasgow, Scotland in November. Faced with this increase in demand, some buyers believe supply may not be able to keep up.
New markets for metals such as cobalt, lithium, or nickel sulfate used in high-performance batteries are emerging to support the transition to electric vehicles (EVs).
The EV revolution applies to battery-focused materials but also to traditional metal products: aluminum is favored for making lower-weight vehicles, and silver is widely used in photovoltaic installations. And of course, the move to electrification could provide higher demand for copper in the years to come.
As for the oil market, companies ranging from super majors to agile shale producers have had to cut their exploration budgets, meaning fewer new projects are being developed. On the other hand, OPEC members have spare capacity to respond to stronger demand. Besides oil, natural gas is a commodity that can be used as a fuel for the bridge between coal and renewable energy. As coal plants are gradually being removed from the grid in the US and Europe, natural gas power plants can get a larger share of the generation mix.
It can be said that of the four BRIC countries, only China was able to match the high expectations of investors from the last supercycle. From 2000 to 2020, the country increased its share of world GDP from 3.6% to 16.3%, according to the World Bank. In the last decade, China has now carefully moved from an investment-driven economy to a consumption-driven model. The 2020 commodity bulls believe that strong demand will not only come from emerging markets, but also from changes in Western economies.
The geopolitical backdrop for this cycle is also very different. At the start of the millennium, China had just joined the WTO, integrating the country into the world economy and further boosting its demand for commodities. Twenty years later, the US, China, and other economies are navigating less hospitable environments, where tariffs and quotas are used more voluntarily.
Finally, it’s also worth thinking about the implications of electrification and decarbonization on a large scale – something that was unthinkable 20 years ago. If we do transition to a lower carbon-intensity economy, in the long term, this could structurally reduce the demand for fossil fuels. On the other hand, it would be dangerous to ignore demand from emerging markets – Africa, Southeast Asia – where population growth alone could lead to increased appetite for oil.
Commodity supercycles are sustained periods, usually more than a decade, of increasing demand for commodities. Long-term high commodity prices due to supply shortages greatly increase the amount of cash held by commodity producers, prompting many of these producers to spend money to expand their production capacity. Many commodity producers responding in the same way to supply shortages raise the possibility that too much new production capacity is created, a dynamic only exacerbated by the long duration of supercycles. The difficulty of matching commodity supply with demand makes commodity prices very volatile.
A variety of economic catalysts can fuel commodity supercycles, and some specific examples from recent history include:
Industrialization of the United States in the late 19th century.
Reconstruction of Europe and Japan after World War II.
The emergence of China as a leading global producer.
Each of these periods of sustained economic growth creates gradual changes in the demand for commodities. But regardless of whether commodity demand is being catalyzed by reconstruction or renewed growth, the outcome remains the same during commodity supercycles. With a supply shortage causing commodity prices to rise, and the development of additional production capacity being initiated by commodity owners.
When did Commodity Supercycles Start?
Basically, commodity supercycles usually follow a period of global recession or depression. This is when commodity demand slows and prices fall. Supercycles can be triggered by changing economic conditions, government actions, new trade agreements, or other factors. Supercycles may not apply to all commodities, so it’s a good idea to look at the specific demand for each commodity to get a good gauge of whether or not supercycles have been started. It may be easier to see the end of supercycles, as happened when oil prices fell starting in 2014.
