Surging commodity prices have analysts forecasting a supercycle – The Average Joe

    Surging commodity prices have analysts forecasting a supercycle

    Victor Lei — Head of Research

    March 4, 2021

    March 4, 2021

    Econ 101: When demand is greater than supply, price rises.

    In the commodities (i.e. oil, copper, aluminum) market, when demand is higher than supply for a long period of time — it’s called a “supercycle”.

    Rising commodity prices are leading analysts to predict that we could be in for another supercycle.

    Supercycles are rare to come by

    We’ve only seen 4 supercycles in the past century. The most recent one was in the early 2000s when China ramped up its spending on infrastructure and urbanization — leading to a decade-long growth in commodity prices.

    At the beginning of COVID, commodity prices took a big dive:

    • Oil prices fell more than 80% as travel demand dropped significantly
    • Copper and other industrial metals prices collapsed as industrial activity halted

    But a recovery in the economy brought commodity prices back to life. Notably, China, which makes up 50-60% of mining demand, restarted industrial activities mid-2020 and gave prices a big boost.

    And they’ve been going strong since. While tech stocks fell hard the past 2 weeks, commodity stocks continue to move up.

    The case for a supercycle

    For there to be a supercycle, commodity prices will need to continue moving up. According to research from JP Morgan, commodity investments have dropped to the lowest portion of investors’ portfolios in more than a decade. If investors were to allocate a larger portion of their portfolio to commodities, prices could continue to rise.

    What else could move prices up?

    • Economic reopenings — which could lead to a rebound in travel/transportation and increase demand for oil
    • Increase in infrastructure spending — as part of Biden’s plans to spend $1.9t on US infrastructure, which relies on the bill passing the Senate
    • Growth in renewable energy — which requires a large number of resources to build the EV infrastructure and batteries

    The case for a supercycle bust

    According to Bloomberg, not all commodities could see a sustained increase in prices. Here’s how growth in one of the largest sectors, renewable energy, could affect commodities differently:

    • Good for copper which is an important material in the manufacturing of EV batteries/ charging stations and today, the world is seeing a big shortage in supply
    • Bad for oil in the long run whose decline is necessary for the growth in the renewable sector

    Whether we’re in a supercycle or not, commodities could continue to see strong growth into 2021 as the economy opens back up.

    Learn more: Are we about to see the death of oil?

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