Are We Witnessing the Start of a New Commodities Supercycle?

Commodity super cycles are decade-long periods in which commodities trade above their long-term price trend. Some market analysts are seeing signs that a new super cycle is beginning now, pointing to a weakening dollar and supportive central banks and fiscal stimulus geared towards infrastructure spending as well as renewable energy. 

The last supercycle could be summarized in a word: BRIC. Brazil, Russia, India, and China  represented 2.6 billion people in 2000, or about 40% of world population. The idea was that the BRIC countries were on a path of rapid industrialization, which would require an unprecedented amount of raw materials, food and energy commodities. The cycle continued for more than 10 years, starting around the turn of the millennium and lasting well into the 2010s. The commodities boom began showing signs of slowing when the great financial crisis and the subsequent Euro crisis roiled markets in 2008 and 2011. It finally came to a halt when the Chinese economy cooled off in 2015.

The last supercycle was supported by a steadily eroding U.S. dollar. The currency had been on a depreciating path since the bursting of the dot-com bubble in 2001. It touched record low levels just as oil prices hit all-time highs in the summer of 2008. Since then, the U.S. dollar had been appreciating until the onset of Covid-19 in March 2020.

Why is it now weakening? The Federal Reserve has joined other central banks in the zero-interest rate policy (“ZIRP”) club as it has pulled all its levers to support the U.S. economy. Mechanically, a weak dollar often feeds into higher commodity prices. Raw materials are almost always priced in U.S. dollars, so a producer often needs to adjust prices upwards to offset the higher production costs in local currency. And on the demand side, a lower U.S. dollar means that, all else equal, commodities have become cheaper for an importing nation, leading to higher demand.

Since the great financial crisis, inflation has been most notable by its absence. This is despite many warnings that quantitative easing and zero-interest rates could lead to runaway prices. Central bankers have also signaled that higher-than-average inflation won’t necessarily result in an immediate rise in rates.

The idea of a supercycle is further supported by pent-up demand that could be unleashed once economies reopen. And many believe that governments won’t embrace the same austerity policies that they applied after the great financial crisis. Government spending is one key pillar supporting the supercycle hypothesis.

In the European Union, the fiscal stimulus package of 1.8 trillion Euros comes with a shade of green, with 30% dedicated to fighting climate change. In the U.S., the Biden administration is preparing a potential $3 trillion bill aimed at infrastructure projects and climate change.

The private sector is following suit, with car manufacturers in America and Europe promising to stop building vehicles with internal combustion engines by 2030 or 2035. It is likely that further commitments will be made in the months leading up to COP26, The United Nations’ annual Climate Change Conference. The event will be held in Glasgow, Scotland in November. Facing this increased demand, some bulls believe that supply may not be able to keep pace.