Supercycle a Step Closer

Roadmap Read time 3mins

15 Jul 2024

By Tim Rocks

Now Reading: Supercycle a Step Closer

Significant structural imbalances appear to be building the foundations of another supercycle for several commodities where demand and supply remain meaningfully disconnected.

There have been big moves in a range of commodity prices so far in 2024. Some of the factors at play are short term but the bigger story is one of structural demand and supply imbalance for several commodities that will affect prices for a number of years and potentially drive another supercycle. This is not true for all commodities, however, with iron ore and lithium facing their own unique challenges.

Converging trends for copper

Copper is at the centre of most of these trends. The copper price has jumped in the short term due to supply problems. Governments have forced the closure of major mines in Panama and Ecuador based on environmental concerns, there has been drought in Chile and China has been aggressively stockpiling. Demand is also rising because of improvement in the global industrial economy after a two year slump.

There is an even bigger structural story that will play out over the next decade. Copper demand is set to double over that period due mostly to electric vehicles and electrical grid expansion but there is no corresponding increase in supply in the pipeline. Other industrial metals including aluminium, nickel and platinum will be affected by some of the same factors.

There are also structural supply problems. Miners are facing greater environmental regulations and shareholder activism. Ore quality is declining and costs are rising because new discoveries are in more challenging areas. Given the long lead time to bring new projects to market and limited exploration activity in recent years, imbalances are likely to last for some time.

Different factors for different metals

These issues are most problematic for industrial metals and energy. There are different factors at play for iron ore, precious metals and agriculture. Gold is benefitting from China’s decision to add more of the metal to its official reserves. Many agricultural crops are being affected by climate disruption. The outlook for iron ore, however, will be heavily dependent on the resolution of the Chinese property crisis; recent government action is likely to stabilise prices and sales but overall construction is still set to fall materially in coming years.

One major commodity that has recently been moving lower is lithium. China is trying to build domestic production and supply has surged out of Chile. At the same time tariffs imposed on Chinese battery and EV exports by the US and Europe could disrupt end demand.

Our preference is to play this theme through commodity producers. Commodity stocks have not kept pace with commodity prices. There is at least a 20% gap now for gold and metal miners and energy companies. We also expect rising commodity prices to push the Australian dollar higher in the medium term.

Copper futures prices

Chinese Copper Stock levels (data since 2007)

What is China preparing for?

Commodity prices and $A

Tim Rocks

Chief Investment Officer

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