There is nothing “super” in this commodity cycle
Commodity prices have soared to very high levels this year.Iron ore and copper prices fell after hitting record highs Moving in Beijing To curb prices. Aluminum prices are rising, and oil prices fluctuate around US$75 per barrel.So are we at a new beginning Commodity super cycle?
Our view is that we are seeing a normal business cycle recovery in commodity prices, not a super cycle. Our definition of the supercycle follows the definition of the Russian economist Nikolai Kondratiev—and his description of the long-term trends that have prevailed over the decades. In the context of commodity prices, the super cycle means price increases that last for 10 to 35 years.
Super bikes are very special events. In the past 150 years, there have been only four super cycles, but more business cycles have emerged.
We believe that commodity prices will fall from their current highs and remain high in the next few years. But we do not predict that prices will rise in ten years, which is worth what the super cycle needs.
All commodities are different, but the current common pattern is that strong demand and lagging supply response drive prices up.
On the demand side, we believe that commodity demand has benefited disproportionately from the nature of the Covid-19 recovery. Blockades and social distancing restrictions have caused people to stay at home and spend more money than usual on durable goods (washing machines, fitness equipment, electronics, and new homes). This has led to spending on durable goods growing much faster than the pandemic trend. This demand in turn affects commodities-steel, copper, iron ore and aluminum.
But the pace of this enduring demand will not last. As the blockade eases, we expect consumer demand to shift from goods to services-because people start to go to bars, restaurants, movies, and vacations. The purchase of durable goods will decline, and the demand for raw materials will also decline.
What about the Covid economic recovery plan that governments invest in infrastructure? Demand from China is exceptionally strong. But we are already seeing signs of relaxation, because China has turned to the tightening phase of monetary and fiscal policy.The European Green Agreement and Joe Biden’s U.S. Employment ProgramInfrastructure spending is about US$1 trillion, which has not changed the rules of the game. Our calculations show that they will only moderate growth in metal demand.
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On the supply side, sustainability and decarbonization issues have intensified. China’s ambition to restrict the use of coal-fired power generation is real. They have caused us to lower our forecasts of future commodity supply, especially aluminum and steel. This means that we expect commodity prices to leave their current highs, but then stabilize at a higher level than we predicted a year ago.
Take copper as an example. Mine output performed better than expected, but the pandemic still poses a threat to copper’s fragile supply side fundamentals. It is expected that a wave of new production capacity will be put into production between 2021 and 2023. We expect copper prices to fall from their current levels in the next few years, but they are still much higher than the industry’s marginal costs.
Starting in the middle of this century, lack of committed copper investment, supply may lag behind demand and push up prices again. There are many projects to meet the growing demand for copper from electrification and renewable energy. But considering environmental issues, mine complexity and political uncertainty, the required supply can only be achieved at a copper price higher than most of the time in the past.
Finally, in terms of non-fundamental factors, inflation concerns have promoted speculative purchases of a large number of commodities and related stocks. Our view is that the rise in inflation is temporary, and we will not go back to the 1970s. Therefore, this speculative activity is a bit misplaced and may cause corrections.
The imbalance between supply and demand caused by the economic recovery from the pandemic may become Consumer shift Their consumption patterns. Before the UN Climate Conference COP26, government plans are still uncertain, and we may get new information that changes our assessment. Until then, this will still be a normal commodity price cycle. nothing special.
Jumana Saleheen is the chief economist and head of sustainability at CRU, a commodity consulting company
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