Everyone’s talking about a new commodity supercycle… what are they on about?
So are we about to launch into another “commodity supercycle.”
That’s the catch-cry doing the rounds right now. “Supercycle”!
If that’s what’s happening, it could have huge implications for the Aussie economy – since we’re such a commodity powerhouse. And remember, the last mining boom lit a fire under house prices in a major way.
It is true that commodity prices have spiked this year.
The real question is whether this is a temporary lift, in the normal boom and bust range of commodities, or does it represent a paradigm shift to a new reality (i.e a supercycle).
So what’s the story? Supercycle or super-hype?
Let’s break it down. So cheerleaders like JP Morgan reckon we’re on the cusp:
The world is likely to have entered its fifth “commodity supercycle” since the start of the 20th century, according to high-profile US JPMorgan strategist Marko Kolanovic, with economic conditions and policy expected to drive a sustained upswing for natural resources.
“We believe that the last supercycle peaked in 2008 (after 12 years of expansion), bottomed in 2020 (after a 12-year contraction) and that we likely entered an upswing phase of a new commodity supercycle,” he argues in new research.
Maybe. But a couple of months of commodity price growth does not a supercycle make.
So what’s the argument here?
There seem to be four things folks like JP Morgan are pointing to.
- First is the rebound out of the Covid lockdown (underpinned by massive infrastructure spending) and the coming economic boom, driven by supercheap money the world over.
- Second is the risk of inflation. Typically commodities, being real, do well in inflationary environments. As the currency devalues with inflation, the price of real things increases relatively. During the oil shock of the 190s or after the dot-com bust, commodities performed very well.
- Third, commodities are very cheap relative to shares right now, and that should correct one way or another. Either share prices correct, or commodity prices lift, or some combination of the two.
“Commodity super cycles tend to occur after periods of loose central bank policy and run for about a decade,” said Chris Watling, chief market strategist and founder of Longview Economics.
“Commodities peaked relative to equities a decade ago and now they are very cheap and below their levels seen in 1969 and 1998 before prior super cycles began.”
- Finally, many people suspect the Biden administration in the US might be on the cusp of a Green New Deal of some sort, with a push for renewable energy projects. This is bullish for commodities since many of these projects are commodity intensive – in things like copper, nickel, silver and platinum.
“New projects need lead times of four to 10 years, and supply constraints will be tested by an aggressive spending spree,” says Michel Salden, senior portfolio manager at Vontobel Asset Management. “Prices for green commodities need to rise by at least 20-30 per cent to secure production capacity in 2025 and beyond.”
So that’s the theory.
It’s a paradigm shift in commodity demand, and supply is going to take years to catch up. Until it does, commodity prices will continue to boom.
And the tough little Aussie economy will boom along with it.
And property prices will surge, like they did in 2014.
That’s the argument, but I’m not so sure…
More on that tomorrow.