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Commodities supercycle - what’s the big story?

A synchronised recovery of the world’s major economies, boosted by huge rescue packages, has sucked demand for raw materials higher. Prices of commodities from oil to copper and from iron ore to timber have soared, with some touching record levels. And that has fuelled predictions of a ‘commodities supercycle’. We take a look at historical surges in demand and ask whether the current spike in prices really makes the grade.

So what defines a supercycle and when has this happened before? To qualify for the title, swiftly rising demand must go way beyond any normal cyclical upswing, with a slower response from the supply side unable to keep pace. These events are rare and often protracted over many years. Examples include the industrialisation of the US economy in the late 19th century, post-war rebuilding in the early 20th century and most recently, the huge-scale modernisation of the Chinese economy, which began in the 1990s. But are circumstances similar today?

It's fair to say that, following the growth shock of the Covid-19 pandemic, levels of economic stimulus have reached an unimaginable scale. This has pumped up commodity demand and pushed prices ever higher, in anticipation of vast infrastructure projects. Added to that are the supply bottlenecks that have dogged the delivery of raw materials. Demand for transport capacity and limited supply have squeezed the Freightos Baltic Dry Index of shipping costs to its own highs. All of which creates scarcity, further fuelling rising prices for commodities.

But where is that vital trigger that can really supercharge demand? It’s just possible that this time around it could be the transition to sustainable sources of energy. Governments across the globe have pledged to meet a target of net zero emissions and will doubtless hold each other to account. The switch will require massive investment to transform existing sources of power supply to greener alternatives, such as solar and wind power. This could amp up demand for certain commodities to unprecedented levels.

Whether we are at the start of a major demand uptrend or whether this is simply a result of recovery, the uptick in prices has prompted authorities in China to warn of ‘zero tolerance’ of speculation and hoarding. It has also raised the spectre of troublesome inflation. While central banks have made reassuring noises about its likely ‘transitory’ nature, the bond markets, ever wary, responded with sudden volatility spikes. If current commodity price trends continue, their vigilance could be tested again in the months to come.