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Is this the start of a commodities supercycle?

Alessandro Sanos, CAIA, SCR
Alessandro Sanos, CAIA, SCR
Global Director Sales Strategy & Execution, Commodities, Refinitiv

Do recent movements in prices indicate the beginning of a new commodities supercycle, temporary cyclical upswings driven by post-pandemic growth, or a mega-trend as the world moves towards a low-carbon economy to tackle climate change?

  1. Commodity prices have risen in recent months, and valuations appear attractive to investors looking to diversify away from asset classes with higher valuations, such as equities.
  2. Should this be the beginning of a new commodities supercycle, it would be the second this millennium following the China-fuelled supercycle during the 2000s.
  3. What we are witnessing is perhaps something more complex, the overlay of several cyclical upswings of different raw materials and the transition towards a low-carbon economy.

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Over the past few months, we are witnessing a broad surge in commodity prices. This upward movement has fuelled expectations among some analysts and investors that a new ‘supercycle’ may have kicked off.

A weakened dollar, supportive central banks, and government spending on post-pandemic recovery programmes fuel inflationary expectations, and have increased the attractiveness of commodities as a hedge against inflation.

From an investor point of view, commodities valuations and their relative performance are low compared with other asset classes, such as equities and the S&P500.

Refinitiv Eikon – commodities: trusted insights for informed decision-making

Graph displaying that relative performance of RCCTR vs S&P500 over five years. Is this the start of a commodities supercycle?
Relative performance: RCCTR vs S&P500 over five years

But even when looking at historical commodity prices, the rebound of the Refinitiv/CoreCommodities CRB Index is gaining steam, in a directional move comparable with the beginning of the last commodities supercycle.

Introduced in the 1950s, the CRB index is a basket of 19 commodities that acts as a representative indicator of commodity markets. The index includes energy, agriculture, and metals contracts.

Refinitiv CoreCommodities CRB total return graph. Is this the start of a commodities supercycle?
Refinitiv CoreCommodities CRB total return

What is a commodities supercycle?

Commodities usually move in bull and bear markets. As an example, rising demand or an insufficient supply tend to push prices higher. But after the initial time lag needed to add supply, oversupply will bring the market back into balance.

But a supercycle is different. Usually driven by structural change across the world, a supercycle can last for decades.

Commodities supercycles are a relatively rare phenomenon, where commodities trade above their long-term price trend over a long period. Only four commodities supercycles have been identified since the 19th century, each tied to a transformational period of economic development.

The last one characterised the first years of the millennium, and it was fuelled by the rapid industrialisation and economic growth of China and other emerging markets.

The BRIC economies were on a path of rapid industrialisation, which created an unprecedented demand for raw materials that producers struggled to meet. Infrastructure expansion and population growth supported rising prices powered by the demand for industrial and agricultural commodities.

The boom lasted until the financial crisis knocked on the door, and the Chinese economy started cooling off.

Do the increased prices signal an upswing caused by a temporary post-pandemic growth, or do they suggest the start of something more substantial?

Watch: The Commodity Boom – Data on the Data – Refinitiv

Should then we be talking of a cyclical upswing?

As we saw, the CRB index has risen over 23 percent YTD, to its highest since 2015. And it has nearly doubled since its recent lows. If a new supercycle were about to start, it would need to be fuelled by robust and sustainable demand for several years, especially from China, the world’s biggest consumer of commodities.

But this may not necessarily be the case. While the global economy is undeniably experiencing a post-COVID expansion, many analysts do not expect this boom to be enough to fuel a new commodities supercycle.

Perhaps, what we are facing, is the overlay of several cyclical upswings with the acceleration of a new mega-trend, the transition to a low-carbon economy.

How does the energy transition impact commodity prices?

Climate change and climate risk pose significant threats.

But the market is coming to the realisation that despite the uncertainty arising by the mix of different tools needed in order to meet the Paris Agreement and the UN’s Sustainable Development Goals (SDGs), there are a lot of opportunities for organisations that will help the economy decarbonise.

The transition to a low-carbon economy will last for decades, and its impact on commodities will not be homogenous. Different commodities will be impacted in different ways, as different raw materials have a varied exposure to climate risk and transition risk.

As an example, energy and metals are increasingly interconnected.

The switch to low-carbon energy is already providing a significant boost to the metals and minerals needed to build renewable energy infrastructure and produce the batteries that support the electrification of the economy and the expansion of the electric vehicles (EVs) fleet.

Copper price graph. Is this the start of a commodities supercycle?
Copper price

Copper – or Doctor Copper as the metal is often referred to for its ability to gauge the health of the global economy due to its widespread applications – has rallied to record highs and over 34 percent since January.

While the seemingly unstoppable EV revolution will provide higher demand for copper and power in the years to come, oil is here to stay as it cannot be switched off completely.

Oil prices are supported by the members of OPEC+, who are restricting supply and holding crude in the ground to sustain prices. By comparing crude oil demand versus supply, there is a forecasted imbalance of over 16 million barrels in 2021 and 15 million in 2022.

Oil prices. Is this the start of a commodities supercycle?
Oil prices 2008-2022

So overall, even if several clues support the idea of a new commodities supercycle, what we are witnessing is perhaps something more complex: the overlay of the accelerated decarbonisation mega-trend with a series of cyclical upswings for different raw materials.

And the most affected commodities will be those that play a role in the energy transition to a carbon-neutral and sustainable economy.

What is the most valuable commodity?

Knowledge is the most valuable commodity.

Historically, the business model of commodity players revolved around exclusive access to information. Companies holding the physical assets and the infrastructure used to control the majority of the data.

Today, technology has democratised data, and it is allowing new entrants to leverage granular and detailed information that was once the privilege of the big players.

And with the number and variety of these new data sources deemed to increase over time, the competitive advantage that is emerging is of how well and how quickly commodity companies can integrate and commingle data from multiple sources, and in different formats, to their proprietary information to make informed decisions ahead of their competitors.

Refinitiv Eikon – commodities: Gain deep insights on commodity trading prices and the markets with Refinitiv Eikon – across energy, agriculture, and metals