Home / Markets / Commodities /  When does a commodities boom turn into a supercycle?

Frenetic trading and surging prices for natural resources – from copper and iron ore to soybeans and lumber – had markets abuzz with talk that the pandemic bounce-back might trigger another “supercycle" for global commodities. With governments pouring recovery funds into infrastructure and pollution-fighting green energy projects, there were signs of a multi-year commodities boom that could stoke global finance and fuel inflation. Such seismic events enrich countries and traders that control resources and have the power to shape the world’s commodity markets.

1. What is a supercycle?

An extended period of strong demand growth that suppliers struggle to match, sparking a rally that lasts years, sometimes more than a decade. That’s in contrast to short-lived cycles created by supply shocks such as crop failures or mine closures. Supercycles tend to coincide with periods of rapid industrialization and urbanization. The last one was fueled by China’s breakneck development after it joined the World Trade Organization in 2001, removing barriers to commerce. Economists identify three others since the start of the 20th century, each driven by a transformational event. U.S. industrialization sparked the first in the early 1900s, global rearmament accompanying the rise of Nazi Germany fueled another in the 1930s and the reconstruction of Europe and Japan following World War II powered a third.

2. What might trigger another?

The U.S. pumped trillions of dollars of stimulus into the economy to keep it from collapsing during the health crisis and planned infrastructure spending to rebuild roads, bridges and the electric grid – projects that would require enormous quantities of materials like steel and cement. Post-pandemic government largess in Europe and other regions could fund the so-called energy transition, the shift to renewable power sources, electric vehicles and everything needed to phase out polluting fossil fuels. That means more copper to produce EVs and charging stations, along with other building blocks of the electric revolution – lithium, cobalt, nickel and graphite – as well as so-called rare earths, needed for hi-tech products and batteries.

3. What are the signs?

In early 2021, prices for many commodities exploded and there were forecasts that they might keep soaring. Copper, whose many uses in industry and construction make it a bellwether, burst through $10,000 a ton in April and Trafigura Group, the leading copper trader, predicted it could reach $15,000 in the coming decade. Soybeans and corn hit multiyear highs, driven by demand from China as it rebuilt its hog herd following losses from a devastating pig disease. The pandemic-fueled surge in homebuilding took North American sawmills by surprise, boosting lumber prices to a record. Shipping costs also rose, while oil rebounded amid signs people were driving more and avoiding mass transit.

4. Will it last?

Underpinning higher metals prices is a decision made by the world’s big miners half a decade ago to stop pumping ever-expanding supply onto the global market and focus on profitability. Now opening new mines will take time, even as Trafigura estimates an additional 10 million tons of annual copper production will be needed by 2030. China’s drive to control emissions may also impact prices, with steel producers under pressure to rein in output. There were signs that China, which consumes half of global metal output, was stockpiling raw materials. Among bulls were analysts at JPMorgan Chase & Co., who predicted the commodities rally would amount to a “roaring 20s" post-pandemic economic recovery. Others argued the price spikes may prove short-lived as consumers focus more on services, easing the strain on demand for commodity-intensive items such as electronics and appliances.

5. Why do supercycles matter?

For one, they can fuel inflation; the rally threatens to raise the cost of goods from sandwiches to skyscrapers. Indeed, 2021 brought a debate about whether central banks might have to reduce support for economies, an idea that roiled markets. But more broadly, commodity booms can have huge consequences for the interplay of money and power. As Bloomberg reporters Javier Blas and Jack Farchy wrote in their book “The World for Sale," it’s essential to understand how oil or metals enrich countries with resources such as Australia, Brazil, Chile, Saudi Arabia and Nigeria, as funds flow through markets into the pockets of tycoons and kleptocrats. Such cycles can impact wars and border disputes, and change the course of history.

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