Are We Entering A New Commodities Supercycle? | Markets.com (2024)

Commodity supercycles are prolonged, decade-plus-long trends in real commodity pricing shaped by major supply and demand structural shifts rather than standard business cycles.

We appear to be in the early innings of a new upcycle as prices across metals, energy, and agriculture accelerate following years of declines.

This article analyzes the indicators supporting a new commodity boom forming and recommends strategies to capitalize.

What are Commodity Supercycles?

Commodity supercycles describe very long-term trends in real commodity prices, typically 10 to 35 years, driven by fundamental shifts in supply and demand.

Periods of rising prices are known as upswings, while periods of declining prices are called downswings.

For example, there was a massive commodity boom from the early 2000s to around 2011 across all sectors, from agriculture to metals to oil and gas.

Strong demand growth from emerging markets like China and constrained supplies sharply drove prices. This was viewed as a new commodities supercycle following a downswing period from the 1980s to the late 1990s.

Supercycles differ from standard business cycle fluctuations in commodities, which occur over shorter time frames of 1 to 5 years. They represent major structural changes rather than temporary supply-demand imbalances.

Consider reading this as well: What is an Economic Calendar?

Forces Propelling Next-Gen Supercycles

Several key drivers can spark the start of a new global commodity price supercycle:

1. Demand is soaring from fast-growing emerging markets as billions of new consumers enter the middle class. Their appetite for food, housing, vehicles, and consumer goods increases commodity demand.
2. There was prolonged underinvestment in new production capacity and supply infrastructure during prior downswing periods. Existing supplies are insufficient to meet suddenly resurging demand.
3. Major positive technology and productivity shocks across agriculture and mining support output growth over the long run. However, these still take substantial time to diffuse and impact global production volumes.
4. Supply geopolitics, including wars, sanctions, and nationalizations, suddenly restrict available supplies. OPEC policy also impacts oil prices over longer cycles.
5. Significant declines in commodity market inventories after extended low pricing makes it hard to buffer against demand strength. Drawdowns precipitate shortages.

Evidence Supporting a New Commodities Supercycle

In recent years, commodities have steadily risen in price across all sectors following the end of the 2011-2016 downcycle.

The Bloomberg Commodities Index, which tracks 22 contracts, has roughly doubled since its lows of 2015-2016. The COVID-19 recession only temporarily disrupted this new price momentum.

We will analyze the fundamental drivers outlined earlier that may support commodity markets being at an early stage of a new upswing over the next decade or longer.

Demand Side Drivers

Emerging economies led by China and India comprise most of the global commodity consumption growth—recent indicators like crude steel production and car sales point to further expansion after COVID-19 declines.

According to McKinsey, urban populations are projected to rise by nearly 2.5 billion people globally by 2050, requiring enormous resources for housing and infrastructure buildout equivalent to adding the size of New York every six weeks.

Transitioning to clean energy systems will be commodity-intensive. Solar, wind, and battery systems require significantly more copper, aluminium, nickel, cobalt, and lithium than fossil fuel equivalents. Electric vehicles use over four times as much copper as internal combustion engines.

Supply Side Constraints

The oil industry capex has fallen over 30% since 2014 and much of it is focused on shorter-cycle shale production rather than longer-term deepwater and oil sand projects. This may sow seeds for future crude shortages.

Major bulk commodities like iron ore and coal require lengthy 5-10-year permitting/development timeframes to expand output, requiring early action to avert shortfalls.

ESG pressures from governments and investors are constraining fossil fuel output expansion and supporting elevated prices as demand recovers post-COVID. Similar dynamics are underway across the metals/minerals sector.

Inventories, including global grain stockpiles, have dropped markedly from peaks as farmers responded to weaker pricing in prior years, curtailing output. This reduces the buffer to handle demand upswing.

Learn more by checking out this useful article: Supply and Demand - Key Factors in Commodities Trading

Macro Backdrop & Geopolitics

Low global interest rates and ample liquidity from central banks provide a supportive financing environment for continued industrialization and infrastructure building in emerging markets.

Supply chain disruptions from COVID-19, climate change pressures, and rising nationalist politics point to partial “deglobalization” forces that could spur more commodity price volatility.

Wars and sanctions taking Russian/Ukrainian grains and fertilizers off global markets show geopolitical issues can severely impact commodity flows.

In totality, conditions are merging across demand growth drivers, tightening supply capacities and the macro policy environment to support a significant new commodity market upswing over the next 10-20 years.

This likely represents an early stage of a new supercycle, although prices will remain quite volatile within a longer-term uptrend. The supercycle may manifest differently across individual commodity segments.

Positioning for a New Supercycle

For commodities traders, producers, and users, recognition that we likely entered a new supercycle implies specific investment strategies:

Maintain long positions across diversified commodity assets, from materials stocks to futures, as secular tailwinds of demand and supply tightness override shorter cycles. However, be prepared for sharp corrections.

Monitor consumption signals from emerging markets and infrastructure/property investment data as key demand gauges. Target industrial metal/energy plays that feed this appetite.

Watch for capacity-related indicators like oil drilling activity, mining capex budgets, and grain harvest sizes, which may indicate supply constraints arising sooner than consensus thinking.

Geopolitical flare-ups can create price spike opportunities. Build cash reserves to deploy when unexpected supply gap events occur.

You might also like to read: Types of Commodities and Their Role in a Diversified Portfolio

Closing Thoughts

While more research is always helpful to confirm, leading evidence proposes we have seen the bottom in commodities after the 2011-2020 downcycle and have started a structural move upwards in global prices.

The trend still appears to be in the early phase, with substantial room for further increases as demand-supply balances across individual and overall commodities continue to tighten.

Monitoring critical metrics outlined for consumption and production trajectories is recommended to refine views on the new supercycle runway.

Producers, traders, and users must judiciously adapt their strategies to capture tailwinds and avoid pitfalls from what history shows can be a volatile ride higher over the next decade or more.

Become a member of markets.com and access a cutting-edge trading platform!

“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”