A New Commodities Supercycle?

Although there is no widely agreed definition, these demand driven cycles commonly refer to decades-long periods, during which a variety of commodities trade above their long-term trends.

Occurrences

Since Commodities range from energy and metals to crops and livestock, pinning down and defining such movements is not simple. UN 2012 DESA Working Paper No 110, suggests that there have been four supercycles during 1865-2009 ranging between 30-40 years with amplitudes 20-40 percent higher or lower than the long-run trend, while others see three such cycles.

In any case, the most recent supercycle is believed to have started at the second half of the 90s and saw Oil prices peaking to record highs in 2008 and metals such as Copper and Iron reaching their highest points in 2011. This long term rise is mainly attributed to the rapid industrialization and economic expansion of the BRICs (Brazil, Russia, India and China), most significantly China's growth during this period.

This last Supercycle that drove cereal prices higher, is also believed to be the culprit of the 2007-2008 Food Crisis.

A New Supercycle?

Following the 2020 pandemic shock that caused a historic plunge to economic activity across the globe, recovery seems to be already underway, with the help of vaccines and unpresented monetary and fiscal stimulus.

This could lead to a protracted demand for commodities and with a shift towards green energy and a focus on Electric Vehicles (EVs), metals could stand to benefit the most.

The new year has definitely started with a bang, with US Oil surging to a nearly 3 year high after bottoming out in April 2020 and Copper – the bellwether industrial metal – rallying to new record levels in May.

Many analysts and banks already claim that we are in the first stages of a new supercycle, but it is probably too early to tell whether this is the case, or we are simply in a "regular" price boom.

After the impressive start to the year, we are now seeing a pullback in some commodities like Copper, Wheat, Soy and others.

Furthermore, these protracted periods of above-range prices, are mainly driven by increased demand due to economic growth. Although the world is experiencing an economic expansion after the COVID-19 plunge, it may be difficult to sustain the same pace and that could imperil the commodities rally.

The International Monetary Fund projects Global GDP of 6.0% in 2021, but only 4.4% in 2022. United States GDP is seen at 3.5% next year (vs 5.1% projected in 2021), while China's output is forecasted to grow by 5.6% in 2022 (vs 8.4% in 2021).