Econ 101: When demand is greater than supply, price rises.
In the commodities (i.e. oil, copper, aluminum) market, when demand is higher than supply for a long period of time — it’s called a “supercycle”.
Rising commodity prices are leading analysts to predict that we could be in for another supercycle.
Supercycles are rare to come by
We’ve only seen 4 supercycles in the past century. The most recent one was in the early 2000s when China ramped up its spending on infrastructure and urbanization — leading to a decade-long growth in commodity prices.
At the beginning of COVID, commodity prices took a big dive:
- Oil prices fell more than 80% as travel demand dropped significantly
- Copper and other industrial metals prices collapsed as industrial activity halted
But a recovery in the economy brought commodity prices back to life. Notably, China, which makes up 50-60% of mining demand, restarted industrial activities mid-2020 and gave prices a big boost.
And they’ve been going strong since. While tech stocks fell hard the past 2 weeks, commodity stocks continue to move up.
The case for a supercycle
For there to be a supercycle, commodity prices will need to continue moving up. According to research from JP Morgan, commodity investments have dropped to the lowest portion of investors’ portfolios in more than a decade. If investors were to allocate a larger portion of their portfolio to commodities, prices could continue to rise.
What else could move prices up?
- Economic reopenings — which could lead to a rebound in travel/transportation and increase demand for oil
- Increase in infrastructure spending — as part of Biden’s plans to spend $1.9t on US infrastructure, which relies on the bill passing the Senate
- Growth in renewable energy — which requires a large number of resources to build the EV infrastructure and batteries
The case for a supercycle bust
According to Bloomberg, not all commodities could see a sustained increase in prices. Here’s how growth in one of the largest sectors, renewable energy, could affect commodities differently:
- Good for copper which is an important material in the manufacturing of EV batteries/ charging stations and today, the world is seeing a big shortage in supply
- Bad for oil in the long run whose decline is necessary for the growth in the renewable sector
Whether we’re in a supercycle or not, commodities could continue to see strong growth into 2021 as the economy opens back up.
Learn more: Are we about to see the death of oil?
