Commodities price rises to continue in ‘Supercycle’ – Economists

Commodities prices, already high across the globe, are likely to continue to rise, as we are in a “Supercycle,” according to a report by Platts at S&P.

“What is the definition of commodity supercycle? It’s a structural upward shift in demand…and we have a structural upward shift in demand occurring,” Jeff Currie, head of commodities research at Goldman
Sachs told Platts in a recent interview.

A Commodities SuperCycle may continue for years. “The last major economic supercycle began around 2002 when China entered an extended period of economic growth. The rapid industrialization and urbanization of that country, combined with China’s acceptance into the World Trade Organization, catalyzed a Supercycle,” explain Motley Fool analysts. The Supercycle continued until the financial crisis of 2009.

Analyst Toby Sims at Fidelity International concurs. “This time around, proponents saw the transition to green energy as a prime catalyst for another supercycle. Roads, bridges, rail links, solar parks and wind farms need industrial commodities, along with some precious metals like silver. Combine that with massive government stimulus packages investing in infrastructure, as well as renewed post-pandemic demand, and hopes were high that we were entering a new age for commodities,” he writes.

In early 2021 copper and iron ore, vital industrial products, were close to highs not seen since early last decade, and the LNG benchmark, Platts JKM, reached unprecedented levels, boosted by economic stimulus spending, Chinese demand and a weaker dollar.

Surprisingly, the energy transition to renewables will boost demand for oi for some time. Currie said that in the case of oil, capital expenditure had fallen an unprecedented 40 per cent in the first half of 2020 and noted that even oil demand would be boosted by spending on the energy transition, due to the volume of oil consumed in the course of green energy infrastructure projects.

Commodities prices are not the only component of inflation, but they are among the drivers.

“Rising inflation expectations and a subsequent boost in investor demand for assets with inflation-hedging capabilities, like commodities, also provided a market lift. Expectations for further global growth and a greater need to compensate for inflation risk—along with excess liquidity, historically low real interest rates, fiscal stimulus, and a weaker trade-weighted US dollar—have underpinned the commodities’ rally year to date,” warn analysts at Franklin Templeton.

Central banks, especially the European Central Bank, welcome the return of upward inflationary movement; the ECB has been trying to bring inflation back to about 2 per cent for the past decade.

But no one wants inflation much higher than that 2 per cent (although central banks are being flexible).

In its last monetary policy statement (July 22, 2021),  the ECB forecast that the medium-term outlook for inflation would remain well below the bank’s target of 2 per cent. Euro area Inflation is currently at 3 per cent, but the bank considers this to be a transitory level. The result is that the ECB is not planning a rate rise in the medium term.

The commodities directly affected most in a Supercycle are in three sectors, according to the Motley Fool:

• Renewable energy development:Many foresee a multi-decade investment cycle ahead for renewable energy. Such a Supercycle would drive increased demand for copper and steel since they’re both vital components of solar panels and wind turbines.
• Adoption of electric vehicles:Advancements in battery storage technologies are partly driving the large-scale adoption of electric vehicles. With increasing demand for electric vehicles comes rising demand for battery metals such as cobalt, lithium, manganese, nickel, and graphite.
• Expansion of data infrastructure:Many people also foresee a massive investment cycle ahead for data infrastructure. Demand for industrial metals like copper would likely rise, along with demand for rare-earth metals, zinc, molybdenum, and other raw materials.

Aside from industrial metals, a Supercycle can also drive increasing demand for precious metals such as gold and silver.

Stock building and an infrastructure boom, however, are among the factors that have led to strong buying across nearly all types of commodities. Certainly the rebound from the pandemic is partly driving this, but these analysts see deeper structural factors that could mean higher commodities prices for a long time.