By CRU Chief Economist Jumana Saleheen and CRU Research Director Lavan Mahadeva, from CRU’s Global Economic Outlook
Editor’s note: This article was originally published by the Financial Times on Feb. 19.
The sharp rise in commodity prices from the depths of the COVID-19 lockdown is fueling talk of a commodities “supercycle” with the greening of the global economy replacing fast-paced Chinese industrialization as the structural driver of demand. We think caution is warranted.
The long history of commodity markets shows that super cycles take from 20 to 70 years from peak to peak. These long swings are caused by insufficient investment in capacity and therefore the booms are spaced out. The last one followed the transformation of China in the mid-1990s and is still not fully spent in our opinion.
Supercycles are not easy to distinguish and should only be called after careful analysis of the facts. In this instance that means a careful examination of the factors behind the recent runup in prices, and the durability of those forces.
The first and most obvious driver is the robust recovery in China. This was largely down to a RMB6 tn fiscal stimulus package—equivalent to 6% of GDP—that was disproportionately poured into the commodity guzzling construction sector. We do not expect stimulus on that scale to be repeated by China in coming years. China’s new dual circulation strategy focused on cutting its dependence on overseas markets aims to transition its economy to one driven by consumption. That will lead commodity demand growth to slow. Not supercycle worthy.
The second factor driving the rally in commodity prices, and equity markets more broadly, is vaccine-driven optimism. A belief that 2021 will be a year of recovery for the world outside of China. Panglossian views cannot drive a supercycle.
Third, investors fearful of higher inflation are shifting assets into gold and copper as a hedge. Markets expect large-scale pandemic stimulus to give rise to inflationary pressure. Particularly in the U.S., where if Biden’s latest package passes Congress, total pandemic stimulus would reach $5 trillion (or 25% of GDP). These are big numbers. However, as Janet Yellen has said, the Fed has tools to deal with inflation. We believe they will use them. Our view is that inflation fears are premature, and not enough to drive a supercycle. Although to those who grew up in the 1970s, seeing inflation and commodity prices rise together might disagree.
Finally, there’s expectations that climate ambition will turn into action in the runup to the UN climate meeting, COP26, in November. Decisive climate policy has the potential to supercharge the demand for key metals, such as copper, nickel, lithium and cobalt. Those metals are necessary to build low carbon infrastructure, such as solar panels, wind turbines, electric vehicles and charging stations.
Climate policies have the potential to drive the next commodity supercycle. But only when concrete policies are announced on the energy transition can we be more confident of this.
Markets often forget that what happens to commodity prices depends not just on demand but also what happens to supply. It is true that on current projections, by 2030 there are sizable supply gaps in some mining commodities. In copper and nickel, we estimate the deficits are around 20%.
Finance remains a challenge for the mining industry, where ESG monitoring has intensified. However, large mining companies could potentially sidestep these barriers if consumers continue to buy their products. Particularly if these products are themselves needed to support a greener lifestyle. If the consequence of environmental pressure, populism and supply chain security nerves is for governments to take a greater interest of mines and plants, this does not bode well for the ability to remove excess supply or lossmaking capacity.
The recent commodity bull has been fed by several forces. Most of these are temporary in nature, and so are insufficient to drive a supercycle. Climate action is the only factor that has the potential to drive a multiyear commodity price rally. But a lot must be said and done before that materializes. It is too early to call a supercycle. Commodity producers, investors, and financiers would do well to take heed.
See our complete view on supercycles in the recently published article: “Commodity price rally does not signal a new supercycle“
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