What is a commodity supercycle and are we in one right now?
Edited by Jekaterina Drozdovica
Commodities had a good run last year, according to an October 2021 report by the World Bank. Metal prices rose 48% over the course of 2021; natural gas and coal prices reached record highs, with the former rising by 69% in Q3 and the latter by 44%; and agricultural products saw a 22% rise over the same period.
The price surge was driven by the post-pandemic recovery and growing demand for green infrastructure, although the report also highlighted the impact of increasing urbanisation on commodity demand.
Oil also soared over 300% from its lows in April 2020, and the global commodity index (S&P GSCI) has more than doubled in value. This leads us to the question — are we currently in a global commodity supercycle, or are the recent price rises just a consequence of supply interruptions and other shocks?
A global commodities supercycle can be defined as a sustained increase in the price of commodities that lasts more than five years — such as the one that began in the early 2000s and ended with the 2008 financial crisis.
But is talk of a new commodity ‘supercycle’ overblown? Here we look more closely at what a commodities supercycle is, what lies ahead for commodity prices and what this means for investors.
What is a commodity supercycle?
Commodity prices can be volatile. But what do analysts mean when they talk about a commodity supercycle, and how can we tell a supercycle from more run-of-the-mill price movements?
A commodity supercycle means an extended period of boom and bust in the commodities markets, with prices falling significantly above or below their long-term trends. These movements may even outlast the business cycle and typically persist for well over a decade.
John LaForge, head of real asset strategy at the Wells Fargo Investment Institute (WFII), explained that commodity supercycles are defined both by their duration and the breadth of the assets they cover.
As LaForge said in a note: “Commodities generally do not act like other major asset classes, like stocks or bonds. Commodities typically move together, like a big family, through long boom (bull markets) and bust (bear markets) cycles. Because each cycle typically lasts between 15 and 20 years, we call them ‘supercycles’.”
Commodity supercycles explained
Research from the Bank of Canada identified four bull supercycles in commodity markets since the 1900s, each of which 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.
The Bank of Canada research found that although each supercycle was caused by a unique combination of factors, a common driver was the interaction of large, unexpected demand shocks and slow-moving supply responses.
According to the paper, the first supercycle coincided with the industrialisation of the US in the early 1900s; the second with pre-Second World War rearmament; and the third with the reindustrialisation of Europe and Japan in the post-war period.
The research explained that the last-recorded commodity price supercycle was driven by a series of important reforms that supercharged Chinese economic growth, including accession to the World Trade Organisation (WTO) in 2001.
What’s driving the current supercycle?
While the above covers supercycles from a historical perspective, many analysts argue that we are at the beginning of a new commodity supercycle, with metals, gas, coal and agricultural product prices having soared over the course of 2021.
But what factors are driving the current supercycle, and how far are we from its peak?
According to analysts who spoke to Capital.com, two key factors appear to be driving the current supercycle: the global recovery from the Covid-19 pandemic and the modernising of infrastructure.
Laith Khalaf, head of investment analysis at AJ Bell, explained that the post-pandemic recovery has contributed to growing prices, especially in the energy sector.
“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,” Khalaf told Capital.com.
The economic reawakening is also compounded by governments investing heavily in green infrastructure, which has a direct impact on commodity prices.
“Looking forward, there may be reasons beyond an economic upswing that prompt higher commodity prices – notably, government spending in infrastructure and the shift to green forms of energy and transport,” said Khalaf.
Jessica Noviskis, senior research analyst for Marquette Associates, explained this further: “[The] build-out of new low-carbon infrastructure including solar panels, wind turbines, as well as electric vehicles and batteries, would specifically boost demand for metals like copper, aluminium, lithium, cobalt and nickel, though to the detriment of the fossil industry.”
Overall, it looks likely that several forces are combining to drive the current commodity surge. As LaForge said: “China, infrastructure spending and the global green-energy transition are candidates that may drive demand over the next bull super cycle.”
Which commodities could be well placed to benefit from the next supercycle? Evidence suggests that commodity prices tend to move together. According to LaForge: “Supercycles are like black holes. Escaping the gravity of a supercycle is difficult for the individual commodity.”
But with demand for green infrastructure set to drive the next supercycle, Tom Stevenson, investment director at Fidelity International, expects demand for certain ‘green metals’ like copper, nickel, aluminium, and platinum 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.
“It hasn’t been plain sailing for all commodities though, as concerns over the Chinese property sector sank iron-ore prices following the Evergrande crisis,” said Khalaf.
Will we see a supercycle at all?
But is all this talk of a supercycle premature? 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.
Some analysts have also expressed uncertainty about whether global post-Covid business reopening and green investments are strong-enough forces to drive another supercycle. Can the post-pandemic period really match the strength of 1960s post-war recovery, or China’s industrialisation?
Research from Marquette Associates suggests that today’s drivers may not be strong enough. Commodity imports into China spiked in 2020, and Noviskis cautions that a new supercycle would require sustained demand. However, the data from China already looks to be reversing, as seen in the chart below.
Capital.com analyst Piero Cingari recently weighed in on the contrast between the previous commodity price rally in the early 2000s and the potential of a commodity supercycle in 2022:
How can investors profit from the commodity supercycle?
If analysts’ predictions of an energy supercycle are borne out, we could be headed for an extended period of increased commodity prices. What does this mean for investors?
According to Fidelity’s Stevenson, the simplest and cheapest way to invest is via a commodities-focused exchange-traded fund (ETF), which offers broad-based exposure to metals and energy.
Investors also have the option of buying specific commodity-related shares, for example in mining and oil companies. Stevenson explained that relatively fixed costs mean that miners’ and oil companies’ earnings could rise more quickly than the price of their underlying resources, which means the shares will have the potential to deliver a high-dividend income.
Despite the generally positive predictions from analysts, Khalaf urged a note of caution: “Commodity prices can be expected to continue to be volatile, though, so investors need to measure their exposure carefully.”
Wells Fargo research conducted by LaForge also found that commodity bull markets were much slower to pick up than dips in the stock and bond markets.
LaForge cautioned: “Commodity prices can fall swiftly, but it often takes years before excess supplies, built up during the bull years, are worked off… If that is not enough to scare investors away during commodity bear supercycles, maybe this one will – over the last decade, commodity prices have lost investors, on average, 6% per year.”
As always, the choice to invest depends on your portfolio, investment goals and attitude towards risk. Past performance is no guarantee of future earnings. And you should never invest more than you can afford to lose.
Are we in a commodity supercycle?
According to Capital.com analyst Piero Cingari, “The fundamental difference between [the current situation] and [the previous commodity supercycle] in 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.”
This could mean that the growth in prices may not be sustainable in the coming years.
How long does a commodity supercycle last?
The phrase ‘commodity supercycle’ refers to a long-term price movement of over five years, generally impacting a broad spectrum of commodities. According to research from Wells Fargo, commodity supercycles typically last between 15 and 20 years.
How to invest in a commodity supercycle
Commodities-focused exchange-traded funds (ETFs) can offer broad exposure to commodity prices. Another option is to invest in commodity-related shares, such as mining and energy stocks. However, commodity prices can be extremely volatile, so investors need to measure their exposure closely.
The choice to invest depends on your portfolio, investment goals and attitude towards risk. Past performance is no guarantee of future earnings. And you should never invest more than you can afford to lose.
Is the world entering a commodity supercycle?
Over the course of 2021, prices rose substantially across a wide range of commodities, with natural gas and coal prices reaching all-time highs. As economies reopen following the pandemic and demand for green-energy infrastructure pushes up demand, many analysts predict that we could be at the start of a new supercycle.
However, as supercycles typically last for 15–20 years, it can be difficult, at first, to differentiate between the start of a new commodity price supercycle and more ordinary short-term price fluctuations.
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iShares S&P GSCI Commodity-Indexed Trust