The market weighs the prospects of the new commodity super cycle

Ten years have passed since the last commodity market boom. This was triggered by the rise of China as a global economic power, and it finally lost its momentum.

However, the wide-ranging rebound has pushed the prices of key raw materials including copper, wood and iron ore to record highs, while also boosting agricultural products. The commodity “super cycle” has arrived.

But what is the commodity price super cycle, and what makes it different from the short-term boom and bust business cycle?

What is a super cycle?

Although there is no accepted definition of a super cycle, it is usually used to describe a period in which commodity prices exceed their long-term trend for 10 to 35 years.

The rise is followed by a fall of similar duration, as supply will eventually catch up with demand. The result is a complete cycle that can last 20 to 70 years.

According to “Capital Economics”, the commodity price super cycle is usually triggered by “some form of structural boost in demand”, which is sufficient to “promote on a global scale,” while supply is slow to respond. .

In natural resources, there is usually a time lag between supply and demand, because it may take 10 years or more to build large mines or develop large oil fields.

How many super loops are there?

Economists have determined the duration of four commodity prices above the trend. The first time was when the United States emerged as an economic power in the 1880s.

The other was accompanied by the reorganization movement in the 1930s and lasted until the reconstruction period after World War II. The third supercycle was during the oil price shock in the 1970s, which indirectly increased the prices of other commodities by increasing production costs.

The most recent price increase occurred during China’s rapid industrialization period that began in the late 1990s. During this period, the prices of agricultural products also rose sharply, triggering the food crisis in 2007-08.

What is China’s super cycle?

In the early 2000s, the speed and scale of China’s urbanization surprised the natural resource industry. Large oil producers and miners are struggling to meet China’s seemingly unsatisfied demand for raw materials, because China has entered a dizzyingly spending phase of economic growth, mainly due to huge expenditures on infrastructure construction and new city construction.

As a result, copper has hovered below US$2,000 per ton for most of the 1990s, setting a record high of more than US$10,000, while oil continued to rise to US$140 per barrel. When supply finally caught up with demand in 2011, and the tsunami of new production finally broke out, the commodity market entered a dull situation in which they were just emerging.

Has another super cycle arrived?

For commodity bulls like Goldman Sachs, the answer is yes.They think the coronavirus pandemic has entered A new era of commodity-intensive growth, Because governments of various countries pay more attention to job creation and sustainable development of the environment, rather than financial stability after the global financial crisis in 2009.

They are referring to President Joe Biden’s 230 million dollars U.S. Employment Program Take Europe’s Green New Deal as an example. Both will inject substantial investment into commodity-intensive infrastructure and projects aimed at achieving the goals of the Paris Agreement on Climate Change.

At the same time, the commodity bulls have highlighted how years of low prices have prompted producers to curb spending on new projects and expansions, thereby suppressing supply. “I believe we are in a super cycle. The CEO of Glencore, one of the world’s largest miners and commodity traders, said at the recent Financial Times summit that we don’t have many shovels ready. project.

This applies not only to the mining industry (investment has been cut after the brutal market downturn in 2014), but also to oil (many companies are seeking to transition from fossil fuels to renewable energy). Some Wall Street banks believe that oil demand will continue to exceed supply growth in the next few years, which may cause the last price increase before electric vehicles cause consumption to peak.

In agriculture, China’s demand and biofuels are driving up the prices of grains and oilseeds. As China looks for imported feed to feed livestock, China’s corn demand seems to be developing on a new track. At the same time, the focus on renewable energy in several countries has led people to focus on biofuels produced in agriculture.

Is there any reason to be skeptical?

Yes it is. For many economists, the strong performance of commodities from the lowest point of Covid in 2020 is only a cyclical rise due to the huge fiscal and monetary response to the pandemic.

They say it lacks the compelling structural demand story that drove the previous supercycle, and that the global green energy transition will not emerge quickly enough to offset the slowdown in China’s already slowing growth in pandemic-era stimulus measures.

Within the scope of the commodity rebound, skeptics believe that it will focus on a few industrial metals, such as copper, cobalt and nickel, which are the key to the energy transition and new projects are in short supply.

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