When does a commodity boom turn into a supercycle?
Frantic trading and soaring prices for natural resources – from copper and iron ore to soybeans and lumber – have left markets teeming with rumors that the rebound in the pandemic could trigger another ” supercycle ”for global commodities. Governments dedicating recovery funds to infrastructure and pollution. In fighting green energy projects, there were signs of a multi-year commodity boom that could fuel global finance and fuel inflation. These earthquake events enrich the countries and traders who control the resources and have the power to shape global commodity markets.
1. What is a supercycle?
A prolonged period of strong growth in demand that suppliers struggle to match, setting off a rally that lasts for years, sometimes more than a decade. This contrasts with the 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 latter was fueled by the dizzying development of China after joining the World Trade Organization in 2001, removing barriers to trade. Economists have identified three more since the turn of the 20th century, each motivated by a transformational event. American industrialization sparked the first in the early 1900s, the global rearmament accompanying the rise of Nazi Germany fueled another in the 1930s and the reconstruction of Europe and Japan after World War II in fed a third.
2. What could trigger another?
The United States has injected billions of dollars of stimulus into the economy to keep it from collapsing during the health crisis and has planned infrastructure spending to rebuild roads, bridges and the power grid – projects that would require huge amounts of materials like steel and cement. Post-pandemic government largesse in Europe and other regions could fund the so-called energy transition, the shift to renewable energy sources, electric vehicles and whatever is needed to phase out polluting fossil fuels . This means more copper for producing electric vehicles and charging stations, as well as other building blocks of the electric revolution – lithium, cobalt, nickel and graphite – as well as so-called rare earths, needed for products and batteries. high-tech.
3. What are the signs?
At the start of 2021, the prices of many commodities exploded and there were forecasts that they could continue to soar. Copper, whose many uses in industry and construction make it an indicator, exploded to $ 10,000 a tonne in April and Trafigura Group, the main copper trader, predicted it could reach $ 15,000 in April. over the next decade. Soybeans and corn hit multi-year highs, driven by demand from China as it rebuilt its pig herd following losses from a devastating pork disease. The outbreak of housing construction, fueled by the pandemic, surprised North American sawmills, pushing lumber prices to an all-time high. Shipping costs also rose, as oil rebounded amid signs that people were driving more and avoiding public transport.
4. Will it last?
The decision by the world’s big miners half a decade ago to stop rising metal prices is to stop pumping an ever-growing supply into the global market and focus on profitability. Opening new mines will now take time, although Trafigura estimates that an additional 10 million tonnes of annual copper production will be needed by 2030. China’s willingness to control emissions may also have an impact on prices , with steel producers under pressure to limit their production. There were signs that China, which consumes half of the world’s metal production, was stockpiling raw materials. Among the bulls were analysts from JPMorgan Chase & Co., who predicted that the rally in commodities would amount to a post-pandemic economic recovery from the “Roaring Twenties”. Others argued that the price spikes could be short-lived, with consumers focusing more on services, which would ease the tension. on demand for commodity intensive items such as electronics and household appliances.
5. Why are supercycles important?
On the one hand, they can fuel inflation; the rally threatens to increase the cost of goods, from sandwiches to skyscrapers. Indeed, 2021 has sparked debate over whether central banks may have to cut back on support for economies, an idea that rocked the markets. But more generally, commodity booms can have enormous consequences for the interplay between money and power. As Bloomberg reporters Javier Blas and Jack Farchy wrote in their book “The World for Sale”, it is essential to understand how oil or metals enrich countries like Australia, Brazil, Chile, Saudi Arabia and Nigeria, as funds flow through markets to the pockets of tycoons and kleptocrats. These cycles can impact wars and border conflicts and change the course of history.
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