This article was originally published on Refinitiv Eikon.
LONDON, Feb 16 (Reuters) – Commodity markets may be about to embark on another super cycle – a multi-year, broad-based, and usually large increase in prices – according to research published by some of the top investment banks involved in the sector.
- Commodity prices have recovered from the slump precipitated by COVID-19. But does this indicate that markets are embarking on a new commodity super cycle or an ordinary regular cyclical upturn?
- Potential catalysts of the next commodity super cycle include industrialisation and urbanisation in India; a new energy infrastructure to support efforts to support new climate targets; and large-scale fiscal stimulus to support economies following COVID-19.
- Combined, these three triggers have a higher probability of creating a commodity super cycle. However, they remain potential triggers, and there is not much evidence to currently suggest they are underway.
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Commodity markets may be about to embark on another super cycle – a multi-year, broad-based, and usually large increase in prices – according to research published by some of the top investment banks involved in the sector.
But while many prices are likely to increase over the next couple of years, after slumping during the COVID-19 pandemic, it is less clear this will mark the start of a super cycle rather than an ordinary cyclical upturn.
Even a cursory inspection of historical time series shows that commodity prices exhibit cyclical behaviour at all time scales, ranging from very short (minutes, hours and days) to very long (lasting months, seasons, years and even decades).
Commodity super cycle or typical cycle?
In a typical cycle, rising prices encourage more selling and production, and less buying and consumption, creating conditions for a subsequent price fall, before the pattern repeats.
In most cases, the cyclical behaviour of individual prices shows only limited synchronisation across commodity markets.
So the term super cycle is reserved for the largest price fluctuations and longest cycles, typically lasting more than 20 years from trough to peak and back again, involving an unusually broad spectrum of commodities.
Past super cycles peaked in the 1910s, 1950s, 1970s and 2010s, according to a study of prices for 40 agricultural, industrial and energy commodities by economic historian David Jacks.
He argues that super cycles have usually emerged from the consumption rather than the production side of the market.
Previous super cycles were driven by the industrialisation and urbanisation of the United States and the First World War, the re-industrialisation of Europe and Japan after the Second World War, and China’s industrialisation and urbanisation in the 2000s.
Jacks noted: “These are demand-driven episodes closely linked to historical episodes of mass industrialisation and urbanisation which interact with acute capacity constraints in many product categories – in particular, energy, metals, and minerals – in order to generate above-trend real commodity prices for years, if not decades, on end.
“However, once such a demand shock emerges, there is generally a countervailing supply response as formerly dormant exploration and extraction activities take off and induced technological change takes hold. Thus, as capacity constraints are eased, real commodity prices revert back to – and below – trend.”
Huge increases in consumption are what distinguish multi-year super cycles from the more routine rise and fall in prices (https://tmsnrt.rs/3k5SimR).
The critical question is whether there is likely to be a comparable increase in consumption over the next few years that could trigger a rise and fall in prices large and long enough to qualify as a super cycle.
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The next decade
There are multiple potential triggers for a larger-than-normal upswing in the cycle over the course of the next five-to-ten years.
The next major economy likely to industrialise and urbanise is India, which would be large enough to set off a super cycle. However, it is less clear whether this would happen imminently.
Construction of new energy infrastructure to support climate targets might also be large enough to trigger a super cycle, if it happens fast enough and on a sufficiently large scale.
Finally, large-scale fiscal stimulus following the pandemic might be enough to trigger a super cycle. However, it is not yet clear if the stimulus will differ from ordinary cyclical government spending.
On their own, India’s industrialisation, the energy transition and large-scale government spending could all spark a super cycle, but the probability would be significantly enhanced if they occurred in combination.
So far, however, all these are potential triggers; there is limited evidence they are underway or will spark a larger and longer than normal upswing in commodity prices over the next few years.
Super cycles are defined by their relatively low frequency and long duration. Not every downturn in the business cycle turns into a depression. Similarly not every upswing in commodity prices will become a super cycle.
There is a risk of overpredicting the occurrence of super cycles. The previous one peaked a decade ago. It is possible another is now underway. But it would be arriving unusually quickly.