Investment Insight | Commodities Supercycle
The global commodities bull market has seen the price of many core commodities reach levels not seen since the mid-2000s. This has occurred across most core commodities including copper, iron, corn, soybeans and oil-based products.
This raises the question as to whether we have entered a commodities supercycle that could last for years, or if we are just in a short-term bull market. This week’s Investment Insight looks at what is driving the current commodities bull market and the factors that could potentially see a multi-year period of high prices.
What is a commodities supercycle?
A commodities supercycle can be defined as a ‘decades-long, above-trend movement in a wide range of base material prices deriving from a structural change in demand’.¹
We often see individual commodities entering bull markets where specific factors impact the supply and demand causing a price spike. Often these individual commodity bull markets are driven by a supply shock where a certain event causes a sizeable amount of product or supply of this commodity to go offline. Examples of this could be a drought that destroys millions of acres of corn crops thereby driving a spike in corn price, or a mine disaster that takes the world’s largest copper mine offline for a number of months.
The key difference with a commodities supercycle is that we a see a sustained increase in a broad range of commodities all at the same time and it lasts for a decade or longer. The driving force of the supercycle typically comes from a sustained period of increased demand.
When there is a sustained period of increased demand, it can take years for the market to balance again because increasing the supply of commodities can often take years to catch up. For example, a typical timeframe to bring a large-scale copper mine online is five years or more from initial planning to ramped-up production.
There have been a number of these demand shocks in the past century that have caused commodity supercycles, such as:
• 2000s: China and other developing nations like Brazil went through a period of very high economic growth as they entered the global trade network. This caused a large and sustained demand increase for core materials globally and a tight commodity market for most of the decade.
• 1950s and 1960s: Reconstruction of Europe and Japan post-World War II drove a multi-decade demand shock for commodities.
• Early 1900’s: United States industrialisation and expansion drove a sustained period of high demand for materials.
Current price situation
Commodity prices globally have been in a sustained period of rising prices since July last year. The Bloomberg Commodities Index (BCOM) which tracks a range of the key global commodities initially fell 27% when COVID-19 hit last year, but since June 2020 it has risen over 55%.
While nearly all commodities in the index have contributed to this rise, some base metal commodities such as copper and iron ore have reached record high prices. Other commodities such as corn and soybeans are trading near all-time highs. While oil prices still remain substantially below the highs they reached in the 2000s, in recent months they have been increasing and some speculators are predicting United States $100+ oil by as early as next year.
The current commodities price bull market has been driven by many of the same factors that are leading to inflation, which we discussed in 11 June 2021 | Return of Inflation. This includes factors that have significantly increased the demand for commodities as well as supply shock factors.
From the demand side we have had a rapid rebound in economic activity as the world emerges from lockdowns. Combined with increasing consumer spending, this has caused a shortage of supply in various products. For example, building activity and home renovations has been accelerating all around the world causing a shortage in materials such as lumber and copper. This demand shock has been fuelled by the unprecedented levels of fiscal stimulus by governments and money printing from central banks.
On the supply side we have seen many COVID-19-related supply and logistics disruptions which have reduced the level of commodities and finished products that can reach their destinations. Many mines, smelters and other industrial operations either had COVID-19-related closures or logistical problems which caused significant disruption in global supply chains. This reduces the supply to a market which already has abnormally high demand levels.
Are we in the next commodities supercycle?
It is still uncertain as to whether the current commodities bull market will continue for years or will prove to be more transitory. However, there are a number of global trends that could result in this bull market extending into a decade-long supercycle:
• Global decarbonisation is driving a significant shift in global production and consumption of commodities. Recently both China and the United States have taken a stronger stance towards meeting environmental targets. This means transitioning away from the energy sources such as coal to greener alternatives. Furthermore, the rise in price of carbon costs is driving many European businesses to transition to different energy sources for production.
• Oil and gas companies are facing increased regulatory and shareholder pressure to cut emissions and reduce oil exploration which, over time, is expected to create further tightness in the energy market.
• Many government policies are shifting towards addressing wealth inequality. This ultimately creates an environment that is supportive for higher levels of consumption, as more money is directed to the lower income earners who have a higher propensity to spend.
• Trade wars or nationalism has been a growing trend. This is having an impact on global supply chains and causing price rises as production is shifted domestically, sometimes at a higher cost.
The combination of the above factors, combined with the current COVID-19 related demand and supply shocks, could see a commodities supercycle like we saw in the 2000s, or perhaps even larger.
How is NZ Funds positioned for this commodities cycle?
We are bullish on commodities and have positioned clients’ portfolios to have exposure to higher commodities prices through direct investment in certain commodities and investment in certain commodity-exposed businesses.
Our bullishness is primarily driven from the COVID-19-related demand and supply shocks. We remain cognisant of the broader global decarbonisation, inequality and trade war trends which means we will maintain a vigilant watch over the commodity space and transition portfolios accordingly.
In the last week commodity prices have had a pullback due to Chinese Government pressure to reduce speculation on commodity prices, as well as a signal from the United States Federal Reserve that they are starting to think about tightening monetary policy. While our view is this is likely to be a temporary pullback, we reduced our commodities exposure so we can look to add back at more favourable levels if the pullback continues.
This raises the question as to whether we have entered a commodities supercycle that could last for years, or if we are just in a short-term bull market. This week’s Investment Insight looks at what is driving the current commodities bull market and the factors that could potentially see a multi-year period of high prices.
What is a commodities supercycle?
A commodities supercycle can be defined as a ‘decades-long, above-trend movement in a wide range of base material prices deriving from a structural change in demand’.¹
We often see individual commodities entering bull markets where specific factors impact the supply and demand causing a price spike. Often these individual commodity bull markets are driven by a supply shock where a certain event causes a sizeable amount of product or supply of this commodity to go offline. Examples of this could be a drought that destroys millions of acres of corn crops thereby driving a spike in corn price, or a mine disaster that takes the world’s largest copper mine offline for a number of months.
The key difference with a commodities supercycle is that we a see a sustained increase in a broad range of commodities all at the same time and it lasts for a decade or longer. The driving force of the supercycle typically comes from a sustained period of increased demand.
When there is a sustained period of increased demand, it can take years for the market to balance again because increasing the supply of commodities can often take years to catch up. For example, a typical timeframe to bring a large-scale copper mine online is five years or more from initial planning to ramped-up production.
There have been a number of these demand shocks in the past century that have caused commodity supercycles, such as:
• 2000s: China and other developing nations like Brazil went through a period of very high economic growth as they entered the global trade network. This caused a large and sustained demand increase for core materials globally and a tight commodity market for most of the decade.
• 1950s and 1960s: Reconstruction of Europe and Japan post-World War II drove a multi-decade demand shock for commodities.
• Early 1900’s: United States industrialisation and expansion drove a sustained period of high demand for materials.
Current price situation
Commodity prices globally have been in a sustained period of rising prices since July last year. The Bloomberg Commodities Index (BCOM) which tracks a range of the key global commodities initially fell 27% when COVID-19 hit last year, but since June 2020 it has risen over 55%.
While nearly all commodities in the index have contributed to this rise, some base metal commodities such as copper and iron ore have reached record high prices. Other commodities such as corn and soybeans are trading near all-time highs. While oil prices still remain substantially below the highs they reached in the 2000s, in recent months they have been increasing and some speculators are predicting United States $100+ oil by as early as next year.
The current commodities price bull market has been driven by many of the same factors that are leading to inflation, which we discussed in 11 June 2021 | Return of Inflation. This includes factors that have significantly increased the demand for commodities as well as supply shock factors.
From the demand side we have had a rapid rebound in economic activity as the world emerges from lockdowns. Combined with increasing consumer spending, this has caused a shortage of supply in various products. For example, building activity and home renovations has been accelerating all around the world causing a shortage in materials such as lumber and copper. This demand shock has been fuelled by the unprecedented levels of fiscal stimulus by governments and money printing from central banks.
On the supply side we have seen many COVID-19-related supply and logistics disruptions which have reduced the level of commodities and finished products that can reach their destinations. Many mines, smelters and other industrial operations either had COVID-19-related closures or logistical problems which caused significant disruption in global supply chains. This reduces the supply to a market which already has abnormally high demand levels.
Are we in the next commodities supercycle?
It is still uncertain as to whether the current commodities bull market will continue for years or will prove to be more transitory. However, there are a number of global trends that could result in this bull market extending into a decade-long supercycle:
• Global decarbonisation is driving a significant shift in global production and consumption of commodities. Recently both China and the United States have taken a stronger stance towards meeting environmental targets. This means transitioning away from the energy sources such as coal to greener alternatives. Furthermore, the rise in price of carbon costs is driving many European businesses to transition to different energy sources for production.
• Oil and gas companies are facing increased regulatory and shareholder pressure to cut emissions and reduce oil exploration which, over time, is expected to create further tightness in the energy market.
• Many government policies are shifting towards addressing wealth inequality. This ultimately creates an environment that is supportive for higher levels of consumption, as more money is directed to the lower income earners who have a higher propensity to spend.
• Trade wars or nationalism has been a growing trend. This is having an impact on global supply chains and causing price rises as production is shifted domestically, sometimes at a higher cost.
The combination of the above factors, combined with the current COVID-19 related demand and supply shocks, could see a commodities supercycle like we saw in the 2000s, or perhaps even larger.
How is NZ Funds positioned for this commodities cycle?
We are bullish on commodities and have positioned clients’ portfolios to have exposure to higher commodities prices through direct investment in certain commodities and investment in certain commodity-exposed businesses.
Our bullishness is primarily driven from the COVID-19-related demand and supply shocks. We remain cognisant of the broader global decarbonisation, inequality and trade war trends which means we will maintain a vigilant watch over the commodity space and transition portfolios accordingly.
In the last week commodity prices have had a pullback due to Chinese Government pressure to reduce speculation on commodity prices, as well as a signal from the United States Federal Reserve that they are starting to think about tightening monetary policy. While our view is this is likely to be a temporary pullback, we reduced our commodities exposure so we can look to add back at more favourable levels if the pullback continues.
1. Super-cycles of commodity prices since the mid-nineteenth century, United Nations DESA Working Paper, 2012.
Source: Bloomberg.
Source: Bloomberg.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Andrew Curtayne is Portfolio Manager for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. Andrew's comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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