A peep at the S&P Commodity Index since the early 90s shows the beautiful China-fueled commodity super-cycle which started in early 2002 and ended in 2015 after a violent, albeit brief, hiccup in 2008-09.
Compared to its predecessors, this was a mini super-cycle. In a UN-sponsored paper entitled ‘Super-cycles commodity prices since the mid 19th century’ (2012), the authors identify three previous super-cycles ranging between 30 and 40 years. The first one occurred in the late 1890s and end in the 30s (U.S. industrialization and WWI). The second took off in the 30s to fade in the 60s (WWII and European reconstruction). Finally, the third one started in the 70s and peaked relatively early to be followed by a long downward phase which ended in 1999.
With a commodity price recovery following a tight V-shape since April 2020, there is much talk about the beginning of a new super-cycle, one that tends to play to the tune of inflationistas.
The arguments supporting the notion of a super-cycle include the idea that the world finds itself at the beginning of a new 7-9 year economic cycle; extraordinary post-crisis infrastructure spending driven by fiscal policies; historical underinvestment on the supply side; a weakening U.S. dollar; and, last but not least, a turbocharged demand for some materials such as copper, lithium, nickel, cobalt and rare earth elements required to support the growth in clean energy tech – a view nicely substantiated in a recent IEA reports on ‘The Role of Critical Minerals in Clean Energy Transitions’.*
None of these arguments are particularly convincing. History shows that when oil is excluded, super-cycles are driven by demand. In that respect, I do not see how the demand for commodities could outstrip supply beyond a transitionary period to normalcy. This is guided by the view that the global economy will revert to its low growth regime in 2023, a perspective supported by the tepid long term bond yield in the U.S and, since Friday, by the White House in its 2022 budget (see table S-9). Furthermore, the specific impact of cleantech on demand for commodities should be put in perspective: it starts from a low base, and it is unlikely to take off before the latter part of the decade. Finally, a further slowdown in China’s growth potential added to secular virtualization or dematerialization trends do not bode well for commodities.
As for inflation, market participants following commodity prices appear to be subject to an acute extrapolation bias, as anticipated in ‘American Gods.’
But perhaps the biggest takeaway is that it is increasingly misleading to look at commodities as a broad asset class. To illustrate the point, copper and coal (each about a quarter of the global commodity mix) are now on a dramatically different trajectory. As much as a bifurcation between Growth/Quality and Value can be observed both across equities and within the industrial sector, the same phenomenon can be observed in commodities and even within each type of commodity (check iron ore).
The mining equipment industry has some good quarters ahead of itself, but discernment is essential when considering the longer-term dynamics. The energy transition materials complex will be interesting to monitor as the world moves towards 2030.
* One could also argue, tongue in cheek, that there has never been a long period of time without it being part of a super-cycle since 1890. It is thus most likely that the world is being subject to one at present as well, without it being apparent yet.