A commodities supercycle or boom is a period of sustained and continued expansion due to increased demand for goods and products. Such supercycles are driven by economic growth and demand for energy sources, manufactured materials, and raw materials.
In-Demand Commodities during a Supercycle
Commodities that are in high demand include natural gas, coal, crude oil, aluminum, copper, and iron ore.
Natural Gas and Oil
Natural gas is used to manufacture iron, steel, bricks, glass, and paper. It is also used by utilities companies for electricity generation and by the commercial sector for metals preheating, incineration, and waste treatment. Crude oil is refined to produce diesel, jet fuel, and gasoline which are used to power equipment and for transportation.
Global political tensions, conflicts, and sanctions as in the case of the Russia/Ukraine conflict push up natural gas and oil prices. Gas prices have already doubled while oil prices have recently reached $139 a barrel, the highest we have seen in about 14 years.
Russia is the world’s biggest exporter of natural gas and the second biggest crude oil exporter. If one country relies on Russia for gas and receives less, it has to find an alternative source, thus impacting supply elsewhere.
Coal is used by steelmakers to produce steel and by utilities companies to generate electricity. Aluminum is a key component of airplane parts, electrical transmission lines, window frames, and other goods. Copper is used as a construction material for plumbing and roofing and for the manufacturing of industrial machinery and electrical equipment. Iron ore has many applications such as manufacturing catalysts, auto parts, magnets, and steels and construction of bridges and commercial buildings.
Demand for industrial metals has been high during all commodities supercycles. In 2008, for example, China’s demand for industrial metals, including aluminum, coal, and steel, resulted in record-high prices in 2008 and kept prices on the rise until 2014.
When it comes to precious metals, we have seen an increasing demand for silver and gold. Commodity supercycles have no effect on the industrial use of specialty metals but they become more attractive as an investment tool and a hedge against inflationary pressures.
Why Commodity Supercycles Occur
Commodity supercycles occur in response to profound changes in how societies and economies function. Such changes increase demand for a wide range of commodities. History has witnessed 4 supercycles over the past 120 years. The first such cycle occurred during the US mass industrialization in the 1890s and continued until 1918, driven by an increased demand for weapons and armaments during World War 1. The most recent commodities supercycle occurred in 2001, with China joining the World Trade Organization. China’s large-scale urbanization and economic reforms increased demand for commodities. The fourth supercycle ended with the onset of the global financial crisis in 2008.
New Supercycle on the Horizon
There are some signs that we are witnessing a fifth supercycle driven by the energy transition and global health crisis. Metal and oil prices have skyrocketed recently, and producers find it increasingly difficult to meet demand. In fact, the China – United States trade war and Covid-19 pandemic forced many producers to reduce capacity while there has been little investment in new coal, gas, and oil supply projects.
In addition, the current commodity supercycle is marked by a growth in demand for agricultural products and specialty metals such as silver and gold. Agricultural commodities, in particular, are expected to increase in value due to demand for biofuels and demand from China. As air quality, water, and land are at a premium, demand for agricultural products will remain high in China for the next 5 – 10 years.
The conflict in Ukraine is also pushing up agricultural commodities prices, with over 17 percent increase in the price of corn, barley, oats, and other grains. Vegetable oils have seen the biggest price hikes (23.2 percent) as Ukraine is the biggest sunflower oil exporter while Russia is the world’s second biggest. Skyrocketing prices for grains, corn, vegetable oils, and wheat are already threatening food shortages around the globe. Shortages are mainly caused due to disruptions in export flows, with large quantities of produce still sitting in Ukraine because of the blockage of major ports. There is also a risk that some crops would be damaged or destroyed, including spring crops such as soybeans, barley, and corn.
Demand for commodities is expected to increase further as economies around the world are gradually reopening after a significant rise in vaccination rates.
How Is the New Supercycle Different?
When a new supercycle is to occur, we are likely to see some differences. One is the green fiscal stimulus that couples up environmental objectives with crisis spending and efforts to restart the global economy. This transition to a system that is more efficient and cleaner is expected to give rise to new emerging sectors and new jobs and opportunities. The American Jobs Plan, for example, includes a proposed $174 billion investment to accelerate the domestic electric vehicle industry, coupled with commitments to green infrastructure and clean energy. The European Union also agreed a massive green stimulus, with funds to be invested in alternative fuel projects that support climate action. China has announced plans to reduce emissions and achieve carbon neutrality by 2060. In Canada, Covid-19-related spending was the main focus of the previous two budgets but in 2022, the federal government announced a comprehensive package of measures aimed at reducing greenhouse gas emissions. Under the 2030 Emissions Reduction Plan, Canada is taking action to promote clean industrial growth, create sustainable jobs, and achieve zero-net emissions by 2050.
This focus on clean energy means that if a new commodity supercycle is to occur, it will be driven by an increased demand for copper. Copper prices already increased by 17 percent in 2021 amidst sustainable and green initiatives. Copper has a wide range of applications such as high conductivity wires, electrical cables and wiring, and power transmission lines. It is used in green and traditional infrastructure and is a major component in electric vehicles, including charging stations, wiring, inverters, batteries, and electric motors. At the same time, shortages are expected to occur due to pandemic-related disruptions of mining operations in Peru and Chile and an increased demand in China. While demand from China is expected to gradually moderate, it will not do so in many parts of the world.
It is clear that the various green stimulus packages and climate change plans will not drive demand for fossil fuels down, at least not in the short run. After all, if we want to build green infrastructure, we will need traditional fuels. Long-term implications, however, are far from clear.