Are we in a commodities super cycle?
Commodity prices have rallied aggressively in the past six months on prospects for normalising global economic activity. Portfolio manager Mike Townshend responds to suggestions that the world is experiencing a new commodities super cycle.
Oil, platinum, copper and iron ore have rallied hard since the 2020 pandemic lows. Brent crude surged 145%, platinum gained 60% and copper rose 80% to levels not seen since the last commodity boom ended in 2011. Iron ore is up 85%. 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 fuelled 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 or catalysts and can last for more than a decade.
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, prices have mostly only just recovered from the pandemic lows. Secondly, what could be the catalyst for multi-decade demand? 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 more 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.