Commodity markets appear to be approaching a new super cycle, but organisations must consider new market factors to capture potential value
Trends in global commodity markets have led many analysts to believe there is a high likelihood of an impending supercycle. Commentary suggests this will be driven by a convergence of factors including the post(ish)-pandemic consumerism boom, supply chain insecurity and vast, intercontinental investment of capital and political will into transitioning towards green economies.
Characterised by extended periods of upward swings raw material prices, a supercycle presents an obvious opportunity for investors and companies operating throughout the sector. However, interested parties should note that this supercycle will be unlike historic examples, notwithstanding the recent diverse socio-political and socio-cultural changes in consumer and producer economies. Therefore, investors and organisations will require a new approach and consideration of new factors to capture any potential value.
Commodities markets are naturally dynamic, based on imbalances of supply and demand. When prices rise, increasing supply leads to a downward trend. Supercycles are different however, where commodities trade well above their long-term pricing trends over a significant period. As such they are rare; only four have been identified since the 19th century, all tied to significant transformational periods of economic development.
The last commodity supercycle, 2002-2014, was driven by the economic expansion and industrialisation of BRIC economies, particularly China. This led to increasing demand for raw materials and hydrocarbon energy sources.
Prices are rising in much the same way as the years prior to the 2002 supercycle, however there are several key factors which mean a future supercycle will operate very differently.
Firstly, is the nature of the supercycle itself. If it happens, this will be the first supercycle not driven by hydrocarbons. Oil, coal, and particularly gas will experience growth due to their instrumental position within the energy mix, but this time it will be metals critical to high-tech consumer goods and the green energy transition which will take centre stage.
This will likely set the scene for hydrocarbons in the next 3 decades, with some forecasters assessing energy demand for fossil fuels to drop by up to 50% by 2050. This could see oil demand collapsing by up to 70% from today’s levels, largely driven by increased penetration of electric and hydrogen fuelled vehicles, with prices slumping to below $20/ bbl.
Therefore, the key winners will be metals and minerals needed for the booming high-tech consumer goods industry and electric infrastructure – aluminium, graphite, nickel, cobalt, lithium and copper to name a few. Other strategic minerals, particularly rare earth metals, may play a role also as governments seek to consolidate their own supplies in the face of geopolitical implications of China’s near-total market dominance.
Scenarios vary wildly, but even in conservative estimates demand for some key metals and minerals may outstrip supply before 2050, namely lithium. This must be taken with a pinch of salt however, as it is based on deployment of existing technologies, particularly electric vehicle batteries – a rapidly innovating industry. Also, remember peak oil? This is not the first time we have seen Malthusian outlooks on key commodities.
Based on this, investors, traders, producers, and suppliers are going to have to pivot their attention towards these key growth areas to benefit.
It is also important to remember the world in which this supercycle is happening, and how recent cultural, social, political and economic trends impact the ways in which firms operate.
The ‘resource curse’ is now well versed within the political discourses of resource producing host countries. The wholesale stripping of raw materials for export has not delivered the sustained socio-economic development and economic transition which western institutions promised in the latter half of the 20th century. As a result, many of these economies will demand more from producers in contributing towards this. Take Tanzania for example, which has seen its natural wealth exported for a century with little to show for it. However, recent administrations have been ferocious in securing production contracts which contribute to socio-economic development by moving refining operations in-country, with manufacturing soon to follow. Gone are the days of profits being hoarded offshore by foreign corporations.
Tanzania’s recent interventions within the mining sector highlight another point – underhand and inconsiderate business practices will no longer be tolerated. Firms trying to manipulate the system to increase profits, at the expense of the host nation, have been fiercely targeted by regulators and prosecutors.
This trend is reflected across the board. Investors, financers and consumers are increasingly restricting flows of capital to firms who are seen not to operate with the best interests of their global stakeholders at heart.
This is highlighted by the explosion of ESG within all avenues of 21st century business over the last three years.
Attention from media and civil society groups is shifting in tandem. As a result, producers will have to take an entirely new approach to how they approach all areas of their business, or risk being left out in the cold entirely.
It increasingly looks like the question is when, not if, this supercycle will happen. For the first time we also have a strong of idea of what this supercycle might look like. However, the question remains if legacy firms of the ‘old-school’ will be able to take recent trends into consideration and benefit from the event.
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