A Commodity Supercycle

The recent jump in commodity prices suggests we may have entered a new commodity ‘supercycle’. This article examines what a supercycle is and the investment opportunities it could offer.

Background to supercycles

A ‘supercycle’ is a sustained period of abnormal demand for products or services, which results in a protracted period of higher prices. Commodities are particularly prone to such extended price cycles because supply can take some time to respond to changing demand.

There have been six previous supercycles in the past 200 years. These have generally been driven by major changes in demand brought on by wars or major waves of economic development. For historical context, previous supercycles occurred around the same time as:

• the initial industrial revolution in Europe
• subsequent industrialisations in the US and China, and
• reconstruction after World War II.

Factors determining the next supercycle

There are a series of intersecting issues and underlying conditions currently having a combined effect on the state of global commodity markets. And these are not set to significantly change or ease anytime soon.

1. Supply constraints

Issues impacting supply are playing a role in extending commodity price cycles. Mining and energy projects have in general terms become more capital intensive ― which has increased lead times and requires more price incentives. At the same time, COVID-related disruptions to global supply chains have also added another layer of complexity and uncertainty to delivery times.

2. Environmental impacts

At the same time there is increasing awareness of the environmental impacts of metal and mineral extraction methods as well as localised environmental issues related to mining at specific locations. This has created additional hurdles for the commodity sector and precluded many projects from proceeding at all.

3. Decarbonisation demand

The current case for a supercycle is largely based on surging demand from decarbonisation. This could see $50 trillion of spending on such areas as transforming electrical networks and infrastructure to facilitate electric vehicles and retrofitting buildings to improve carbon efficiency.

This level of investment will be supplemented by major spending on defence and healthcare and a redesign of the way we manufacture. The overall impact is likely to be exacerbated by significant inertia on the supply side, given exploration and capital expenditure in many commodities has, up until now, remained very low.

On a geopolitical front, there is also the prolonged impact of Russian trade sanctions, which could potentially extend well beyond the current hostilities in Ukraine. This could add further to supply pressures and increase the urgency of the decarbonisation push to reduce the world’s dependence on Russian oil and gas.

The outlook

The transition to renewables will be commodity intensive.  Consider for example:

• The world will need twice as much mined copper in the next 30 years as it has in the last 30 years
• Electric vehicles use four times as much copper as petrol-based cars, and they will also need more infrastructure to connect charging stations to the grid
• Copper supply needs to be 40 per cent higher by 2030 than what has already been committed. There is currently not enough committed to rebuilding transmission networks to achieve goals.

It’s clear there are challenges ahead. However, a supercycle also presents potential long-term investment opportunities.

A range of commodities are set to benefit from the rush to decarbonise, including copper, nickel, aluminium, lithium, and graphite. And any underinvestment in these sectors means rising demand is likely to lead to higher prices. It’s also worth noting that gold, commodities, and energy exposure can also provide a level of protection against persistent inflation.

This is a rapidly evolving environment and there is still much to play out, so investors are encouraged to speak to their adviser.