Are We on the Verge of a New Commodity Super-Cycle
Commodity supercycles – long-term periods in which such assets like commodities are being in high demand due to various economical factors. Some market analysts have predicted that the new commodity supercycle will start sooner or later due to the weakening of the world’s leading currencies and increasing support of infrastructure spendings and renewable energy.
What did the last supercycle bring us?
While commodity supercycles last we usually witness a rapid growth of the countries which economies are mostly relying on supplies instead of technologies and solutions. For that instance world’s biggest commodity-relying economics collided into one union called BRIC. BRIC includes Brazil, Russia, India, and China which represents about half of the world’s population. Countries in the union were only at the start at the path of rapid industrialization which requires a large number of raw commodities like oil, gas, wood and etc. The previous cycle has continued for more than 10 years which allowed the above-mentioned countries to grow massively.
The slowing of the previous cycle has taken place from the years 2008 and 2011 when the great financial crisis hit the markets. Once economies cooled off a little and started growing back again we’ve witnessed the change in the demand on the markets from traditional and safely growing commodities to risky assets like stocks.
Why do we think that the new Supercycle is around?
While the last supercycle lasted the growing economies received nothing but benefits from it and continuously used it to sell their commodities for elevated market prices. But at the same time countries like the U.S. have experienced a major drop in the value of their currency. We could track a clear correlation between oil prices and the dollar that has been at the lows once oil hit the ATH.
As we can see the U.S. dollar is showing us early signs of weakening since April of the last year. According to the DXY chart dollar has lost more than 10% of its value and the reason for it is ZIPR or Zero-Interest Rate Policy. Bearish tendencies on the U.S. dollar often fuel the price increase on the commodities and raw materials that are mostly priced in dollars. Since the currency is losing value the producer of those commodities has no other choice but to increase the price of the asset.
Another signal of an upcoming supercycle is the elevated inflation rates that were non-existent only a couple of years ago in U.S. Quantitative easing and zero-interest-rate have led to the huge growth of the stock market but at the same time has increased the inflation rate. For that matter, central banks should usually increase the key rates to prevent additional increases but currently, we are not seeing any signals about it.
Once COVID-19 hit the markets and the world in general we’ve seen a unique case of almost non-existent demand for raw materials. But right now the developing economies and commodity price has already got back to the post-pandemic levels and it seems like the absence of the commodity demand has additionally fueled an upcoming commodity price increase.
What commodities will benefit the most from another supercycle?
Even though the previous cycles have shown us how oil can benefit from the elevated market demand the next supercycle won’t be a copy of a previous one. We expect that a whole new market for metals that are being used in high-performance batteries is going to emerge. Cobalt, lithium, and nickel are most likely to become the main drivers of the new supercycle. In addition to that more traditional options like copper will of course be in demand due to global electrification.
Oil markets are most likely to remain their growth rates due to the absence of new projects and solutions. Companies have slashed their exploration budgets due to the infectivity of such activities. But it’s not as bad as you might think. Thanks to the OPEC agreement oil mining and production are now being under control in order to increase demand on the market. Another commodity that has a lot of potentials is natural gas that can be used as renewable energy. Currently, coal plants are being progressively removed by the governments for the sake of ecology and environmental saving.
What are the similarities between old and new supercycles?
Even though previously commodity bulls have expected the rapid increase in the economy of the emerging markets now they expect a “surprising” growth of the already developed countries like U.S. due to the changes in economical and environmental policies.
But the old supercycles “players” are still going to largely benefit since the main driver of the previous cycle – China is being one of the most attractive investments offering on the market with steady GDP growth from 3.6% to 16.3% according to World Bank.
In addition to the economy let’s not forget the geopolitics that has the same if not the greater impact at commodity prices. At the beginning of the previous cycle, China had only joined WTO which was a large step towards the globalization of the economy which in its part fueled demand for commodities. Today economies are more collided with each other and working more willingly compared to the last cycle.
Last but not least – total electrification and decarbonization trends are something that we should follow while the new commodity supercycle lasts. Lower carbon intensity will most likely affect the market trends directly. Demand for fossil fuels will decrease one day or another. But let’s not forget that not all the regions are already developed and there are still some countries out there that most likely need fuels like oil for progressively increasing industrialization. Southeast Asian and African markets are most likely to become the biggest importers of cheap and yet useful fuels.
How the stock market and retail investors are going to react?
There are two states of the market in general which are the risk-on and risk-off markets. While the risk-on prevails on the market retail investors and traders are looking for investment in more volatile assets like stocks. In addition to that people start spending more money on expensive goods instead of investing any of funds. Once risk-on turns into risk-off for any reason investors are looking more in the side of preserving the funds that they’ve received in the risk-on markets and starting to invest in less-volatile products like gold and currencies.
Even though products like oil are considered commodities, it’s not always a “safe haven” asset for investors. Oil is more likely to grow in the risk-on markets since the demand for it is higher. Once markets turn risk-off commodities like precious metals receive more demand and funding from investors.
Traders and investors have already reacted to the upcoming trends and have started to invest more in commodities but at the same time, the stock market hasn’t yet stopped growing. In this supercycle, we might witness unique market conditions in which both risk-on and risk-off financial assets are going to perform equally good.
Super-cycles are a long-term process that doesn’t immediately reflect on the current market conditions. Sometimes supply response after years of being under the commodity cycles. In this case, copper and other metals are most likely to start to perform only after a few years. Once “green” initiatives are released and implemented in the current infrastructure of major cities demand will most likely increase exponentially. Most of the copper investment projects haven’t been approved and they will take years to come to become fully operational.
Every supercycle differs from another and the upcoming one will probably bring us even more surprises that we are not ready for. We are going to look forward to a progressive but not strong value increase in the oil (thanks to OPEC and developing continents) and a rapid demand increase on metals that are going to be used in the production of high-performance batteries.