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Assessing the Likelihood of a Commodity Supercycle
Wednesday May 10
By Ben Taylor · Commodities
Commodity supercycles, like earthquakes, can have effects that are long-term and far-reaching and sometimes they come without warning.
Supercycles are a powerful force. Consider the one that occurred between 2003 and 2008 when the real prices of metals and energy more than doubled. During this period the real price of food commodities surged by about 75%.
These are not passing trends. Supercycles tend to stretch over long periods with upswings of 10-35 years and occur across a range of commodities. These cycles are long because they are sparked by a demand for raw materials needed when countries experience urban development and industrialization which often unfold over decades. One of the biggest factors underpinning the massive 2003-2008 cycle was the ascent of China and its acceptance into the World Trade Organization. In a relatively short period, China went from having a per capita income that was only one-third of that of sub-Saharan Africa to producing about half of the globe’s major industrial goods.
Previous supercycles started for similar reasons. During the early twentieth century the US experienced a rate of economic growth leading to a supercycle. Similarly, the post-war reconstruction in Europe and Japan’s post-war economic rise both fueled a supercycle as demand for raw materials soared.
Commodity prices jumped in 2021 and 2022 and some investors are asking if this was a tremor or the start of something bigger. Here we look at three factors that could support the emergence of a new supercycle.
Consumers and industries are making the move to sustainable solutions. Meeting this demand will require more metals than we have ever needed in the course of human history. The EV boom is just one example of this established, long-term trend. Over half of all passenger cars sold in the US will be electric in just seven years. The below chart from the International Energy Agency (IEA) shows the extent of this trend.
Source: IEA
This broad adoption of EVs will have a multiplying effect on demand for numerous commodities given that an electric car requires six times the mineral inputs of an ordinary car according to the same body of research. Lithium, nickel, and aluminum are all in high demand as manufacturers roll more cars off the line.
In the first half of last year, the amount of nickel used in new cars increased by 50% over the previous year. Demand for lithium is expected to reach three to four million metric tons by 2030 which is a considerable rise from the demand of 500,000 metric tons seen just two years ago based on forecasts from McKinsey. Meanwhile, demand for aluminum is expected to rise given that plug-in hybrid and full-battery electric cars use about 25% more of the metal than conventional internal combustion cars.
Other green tech like wind power and solar power both require enormous amounts of zinc, and manganese. Additionally, demand for copper, critical to electrified solutions, is forecasted to rise by 50% between now and 2040 according to research from BloombergNEF.
Russia and Ukraine are key exporters of grains, fertilizers, and energy all of which have seen declines in availability as a result of the war.
Research from the World Bank cites two main causes of these shortfalls. The first is blockades and the destruction of productive capacity. The second is sanctions. As the war continues without an end in sight, the globe is feeling the impact given that Russia is the largest exporter in the world of pig iron, wheat, and natural gas. Until recently, Russia also provided a considerable amount of the world’s fertilizer. Meanwhile, Ukraine, which accounts for about 10% of the world wheat market, experienced an export decline of about 20% from projections made prior to the war. The data below shows just how widespread the rise in commodity prices was in 2022.
Source: World Bank
Many of these shortfalls are likely to be long-term because countries like Canada, Japan, the United Kingdom, the US and the EU have committed to eliminating, banning, or dramatically reducing their imports of Russian energy products.
As the war continues in its second year it seems increasingly unlikely that these commodities will come down in price. The core of the problem is the sheer scale of resources from Ukraine, Russia and Belarus that previously fulfilled global demand. These three countries also represented a major share of exports in commodities like coal, barely, corn, aluminum, crude oil, and platinum.
As energy costs rise the expense of shipping commodities is also growing. As a result, European countries are now relying more heavily on imports sourced from more distant locations like Latin America, The Middle East, the US, and West Africa.
The extent of these cost increases is seen in research from McKinsey showing that “since the first quarter of 2021: Baltic dirty, Baltic clean, and liquefied natural gas (LNG) tanker rates have increased by approximately 228 percent, 195 percent, and 266 percent, respectively.”
Source: McKinsey
In the short term, providers have been relying on optimizing freight, rerouting flows, and leveraging storage assets but these measures will only work for so long. The long-term outlook is more daunting. The same body of research from McKinsey forecasts that “an additional $300 billion to $500 billion could be required to finance global commodity trading.”
Interestingly, this development could impact commodity prices for another reason. As the cost of conventional energy sources rises more shippers are incentivized to begin adopting alternative energy sources which could further increase demand for the green transition metals mentioned earlier.
The outlook for a new commodity supercycle is unclear. The conditions that have sparked previous supercycles – industrialization, urbanization, and post-war reconstruction – are not present. However, the three factors detailed above, which appear to be unfurling simultaneously, might together support a sustained rise in commodity prices.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. or Trackinsight. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
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