Commodity prices experience multi-year periods of boom and bust, known as supercycles. While economists debate their exact cause, the most widely held theory is that supercycles are caused by a lag between unexpected, persistent, positive shocks to commodity demand coupled with supply that can’t keep up. Given the shocks caused by the global pandemic, are we poised to enter a new supercycle in commodities?
Are conditions right for a supercycle?
Given the realities of 15+ months of global pandemic, it’s evident there is a definite gap between supply and demand globally. With the vulnerabilities of just-in-time supply chains exposed by the pandemic and the spike in the price of commodities like lumber since March 2020, there have been concerns that the world will “run out of everything.” Coupled with the continuing strength of the economic revival as the world begins to open back up, global demand has boomed while pandemic-driven supply shortages continue. So, it certainly seems like the conditions for a commodity supercycle may be in place.
However, a recent TD Economics report pegs the recent rally in commodity prices to merely short-term supply and demand issues as well as accompanying economic factors, and not the onset of supercycle conditions. In particular, the TD report cited financial market conditions that have helped boost commodities, such as falling bond yields, monetary stimulus, and a decline in the US dollar early on in the pandemic. Likewise, growing concerns about inflation have triggered something of a feedback loop as fears of higher inflation drive up commodity prices, leading to greater worries about inflation.
“We expect that the commodity price rally may have some further room to run over the next few months and have even built in more strength in some areas in [the third quarter],” TD said. “However, beyond some pockets of further near-term upside, we expect most commodities to start moderating in the second half of the year.”
Will China command world metal prices?
There remain significant questions, however, about commodities in the short- to medium-term as the world emerges from the pandemic. One example is China’s role in setting global prices for metals and how that could impact the potential for a new supercycle.
Chinese demand drove metals price surges in 2011 and 2017 and is doing so again now. China’s massive steel industry—which remains 60% state-owned—consumed 70% of world iron ore production last year, despite the pandemic, and 58% of the world’s copper.
But there are signs that China could flex its muscle in metals in ways that will impact the global market. For one, there are signals that the Chinese steel industry could cut over-production to meet long-term carbon-reduction targets. The Chinese government also promised a crackdown on “malicious speculation” in commodities markets, promptly sending the local price of iron ore and steel downward by 7%. The Chinese may also begin to reduce pandemic stimulus while metals producers and traders hold full inventories, leading to the possibility of oversupply relative to demand.
Low metal prices and mining stocks
Though net long positions on commodities of all types are at a 25-year high globally, BCA Research anticipates a downward trend for metals over the next six months. This could have a negative impact on
mining stocks such as Glencore (GLEN.UK) and Anglo American (AAL.UK).
Beyond supply-demand dynamics and financial conditions, however, there are other factors to consider that will have a downward pull on the price of commodities. Demographics is a primary consideration here. As reported recently, China’s population growth is slowing, meaning that its consumption levels in recent decades cannot be sustained. As the primary global consumer for over 50% of some base metals and a significant source of demand for oil, reductions to China’s overall needs of these and other commodities will have ripple effects felt the world over.
Could green investment boost commodities?
As one analyst noted, another major economy would have to undertake a massive infrastructure-driven economic transformation akin to what China did during the 2000s to make up the shortfall from predicted changes in China’s consumption of commodities. Could the rise of the green economy be that driver?
Already, both the US and EU have plans for massive investment in green infrastructure across their economies. The rejuvenation of ageing power grids to handle power input from widespread and diverse forms of alternative and renewable energy sources such as wind, hydro, and solar could drive demand for base metals, particularly copper, according to TD Economics.
Likewise, the global shift to electric vehicles (EV) will grow the need for copper. While EVs require four times the amount of copper as internal-combustion vehicles do, for now, global EV manufacturing requires just 3.5% of the world’s copper. But as EVs grow market share, the need for copper and other metals used in their manufacture will only grow, diversifying demand for metals away from China.
Are we poised for a supercycle in commodities?
For the reasons outlined above, at this time, conditions do not appear suitable for the onset of a new commodity supercycle. Instead, as TD Economics points out, it is short-term supply and demand conditions and a variety of economic factors driving up commodity prices, rather than underlying conditions that make a commodity supercycle likely. There remain, however, questions about how more significant trends, like the state of Chinese demand and the potential rise of green infrastructure and EV manufacturing, could affect global commodities over the coming years.
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