April 7

Commodity Supercycle: What Is It, and Can You Make Money from It?

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Last Updated on 7 April, 2022 by Samuelsson

Commodity Supercycle: What Is It, and Can You Make Money from It?

While the global economy tends to be very cyclical — that is, it is prone to alternating periods of boom and bust — there are times when a cycle persists in the boom phase for a prolonged period. With the steady rise in commodity prices over the last 10 years to 2021, one may ask whether there is a commodity supercycle. But what does that mean?

A commodities supercycle is a period of sustained increase in commodity prices, driven by structural changes in the global economy. It is a relatively rare phenomenon and is characterized by commodities trading above their long-term price trend over a long period. In fact, there have been only four commodities supercycles since the 19th century, and each is tied to a transformational period of economic development.

We’ll discuss the topic under the following headings:

  • What is a commodity supercycle?
  • The previous commodity supercycles in recent history
  • Which commodities are most in demand during a supercycle?
  • The next supercycle may not be like the previous ones

What is a commodity supercycle?

A commodities supercycle may be defined as a period of sustained increase in commodity prices above their long-term trend for between 10 to 35 years. It is a relatively rare phenomenon and is often driven by structural changes in the global economy.

The world’s economy tends to be cyclical, alternating periods of boom and bust. The upswing is followed by a downturn of similar duration as supply eventually catches with demand. There are four stages of an economic cycle: expansion, peak, contraction (recession), and trough, which is followed by another expansion to mark the beginning of a new cycle. While a typical economic cycle lasts about 5.5 years, supercycles are characterized by commodities trading above their long-term price trend over a long period.

Economics experts believe that commodity price supercycles are typically triggered by events that cause some sort of structural boost to commodity demand at a level that is large enough to alter the balance in the global demand and supply of the commodities involved. When there is a sudden huge demand for commodities, there would often be a lag between supply and demand because it can take up take 10 years or more to build a big mine or develop a large oilfield.

Understanding commodity supercycle

As you know, commodities are raw materials for running the world economy. They include industrial commodities, such as oil, copper, and zinc; agricultural commodities, like cotton and grain; and precious metals, such as gold and silver.

Commodity prices are highly cyclical: when prices rise, commodity producers boost supply to take advantage of the rising prices, but when supply rises to meet demand, prices fall again. So, by and large, commodity prices tend to stay mostly in a range over the long term. However, when there is a structural event that boosts the global demand for commodities, supply struggles to keep up as producers adjust to meet the demand, leading to a sustained period of rising commodity prices.

The previous commodity supercycles in recent history

According to economic experts, there have been only four commodity supercycles since the 19th century. They are as follows (see the chart below):

  1. In the 1880s: This was triggered by the emergence of the US as an economic powerhouse.
  2. Between 1933 and 1950: This was triggered by the rearmament drive of the 1930s and continued into the reconstruction period after WW II.
  3. In the 1970s: This was triggered by the oil price shocks of the 1970s, which indirectly boosted the prices of other commodities by increasing production costs.
  4. In the late 1990s/early 2000s: This was triggered by China’s rapid industrialization drive in the late 1990s and early 2000s. The speed and scale of China’s urbanization fuelled by huge spending on infrastructure and the creation of new cities created a huge demand for commodities and caused commodity prices to skyrocket. But when supply finally caught up with demand in 2011, the commodity markets entered a deep contraction. They are only emerging from it in the post-coronavirus pandemic period that started from 2020. See the chart below:

commodity supercycles

Which commodities are most in-demand during a supercycle?

Most supercycles are driven by huge demands for industrial metals and energy, both of which are crucial for running an industrial economy. The most common industrial metals and energy commodities that rise in demand during supercycles include:

  • Iron ore: This is important for making steel, which is used in constructing buildings and bridges.
  • Aluminum: It is used in making window frames, electrical transmission lines, airplane parts, and other important products.
  • Copper: This is used to manufacture industrial machinery (like heat exchangers) and electrical equipment (such as wires and motors). It is also a key material in buildings (roofing and plumbing).
  • Crude oil: It is refined into gasoline, jet fuel, and diesel, which are used for transportation and in powering machinery.
  • Coal: It is used to produce electricity.
  • Natural gas: It is used to generate electricity.

The next supercycle may not be like the previous ones

Many economists believe that the next supercycle will not be like the previous ones, especially with regard to the commodities that experience growth in demand. Historically, the global energy supply has been from fossil fuels such as coal, crude oil, and natural gas, and those commodities experience huge demand growth during supercycles. But with climate change and the necessary transition to low-emission power sources and modes of transportation, the demand for coal, crude oil, and natural gas may decline. Furthermore, the move away from industrialization and toward digitalization could significantly determine the commodities that experience the most demand growth in the next supercycle.

By and large, the next supercycle may be determined by the following:

  1. Expansion of data infrastructure: The world is in a digital revolution, so the demand for data infrastructure is expected to rise. Thus, industrial metals like copper, zinc, and molybdenum are expected to experience huge demand.
  2. Renewable energy development: Climate change is forcing the world to transition to low-emission renewable energy sources, such as solar and wind. Economists foresee a huge demand for copper and steel which are both vital components of solar panels and wind turbines.
  3. Adoption of electric vehicles: With the advancements in battery storage technologies, electric vehicles are becoming very popular. The increasing demand for electric vehicles will lead to a huge demand for battery metals, such as cobalt, lithium, manganese, nickel, and graphite.

   


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