Are we in a commodities super cycle?

Oil, copper, iron ore and platinum have rallied hard since the 2020 pandemic lows. Brent crude surged 150%, both copper and iron ore have more than doubled to new all-time highs and platinum gained 75%. There’s talk in the financial press of a new commodities super cycle—what’s going on here?

Commodity prices usually follow the supply and demand pressures of the economic cycle. During booms, commodity demand is fueled by greater travel, manufacture, infrastructure development and trade. Rising demand drives up prices, incentivising producers to extract more commodities and explore for new reserves. As production rises, supply inevitably exceeds demand and prices eventually fall.

Economic cycles repeat themselves every five to seven years, on average. Commodity cycles follow similar patterns. Super cycles are extended periods of above-trend price gains seen across large parts of the commodities complex. They depend on megatrends that drive demand to new highs and can last for multiple decades.

The last super cycle began in the late 1990s, when rapid Chinese urbanisation and infrastructure development combined with global underinvestment in new commodity supply to drive commodity prices to multi-decade highs. Producers initially struggled to increase output to match this unprecedented growth in demand, despite the incentive of extraordinarily high prices.

The adage that the ‘cure for high prices, is high prices’ then proved true as producers invested heavily to increase commodity output. At the same time, Chinese growth slowed from heady double-digit rates to more modest growth rates, with less emphasis on infrastructure development and more focus on the consumer.

It may be too early to call, but I don’t believe the current commodity cycle will develop into a super cycle. Firstly, recent price surges are mostly a recovery from the lows of early 2020 and boosted by the huge fiscal and monetary response to the pandemic. Secondly, there is no clear catalyst for a structural change to multi-decade demand growth. Chinese growth is slowing, India has a massive population but does not have the political unity to co-ordinate sustained infrastructure spend, and the Western world is grappling with ageing populations and over-indebtedness. There are no significant supply constraints.

Specific commodities could nevertheless experience extended price growth. Demand for metals and materials that support renewable energy and electric vehicles should grow over the next decade.

‘Green metals’ such as copper, cobalt and lithium are probable beneficiaries of the transition to a carbon-neutral economy.

Foord’s portfolios have meaningful investments in the best quality resource shares. However, the cyclicality of earnings streams makes us reticent about being overweight in this sector in the long term. Material investment in diversified miner BHP Group (and to a lesser extent, Anglo American) affords valuable exposure to two of the world’s largest copper mines. Foord’s global funds have direct copper exposure via US miner Freeport-McMoran and leading lithium battery material producer Livent.