Commodities Supercycle: Fact or Fictions?

A commodities supercycle is different from a short-term cycle in three ways. Firstly, the duration of a supercycle is exceptionally long, lasting at least 10 years. Secondly, price increases during a supercycle occur across a broad range of many commodities. Lastly, while short-term cycles are driven by temporary shocks, such as recessions (the 2007-09 global financial crisis), as well as accidents (the 2019 Vale accident in Brazil, which disrupted iron ore supplies), in contrast, permanent shocks, such as technology and policies, drive supercycles. A widely accepted view is that there have been four supercycles since 1900. These roughly coincided with periods of rapid industrialisation. The first cycle coincides with the industrialisation of the US in the late 19th century. The second, with the onset of global rearmament before the Second World War in the 1930s. The third, with the reindustrialisation of Europe and Japan in the late 1950s to early 1960s. The last commodity price supercycle began in the mid-to-late 1990s, the same time as a series of significant reforms were occurring in China, including its eventual accession to the World Trade Organization (WTO) in 2001. Therefore, the general trigger for a supercycle is an unexpected increase in demand. Prices increase until capacity is built to meet the demand. For commodities, the delays in bringing through new capacity can be extreme, as it can take more than five years for a new mine to deliver after the initial spending.

Looking at the long-term trends of supply-demand for commodities, we find three main reasons why the world is unlikely to enter a new commodity supercycle.

• Firstly, we are unlikely to witness a long-lasting, simultaneous price increase across many commodities because not all commodity supply will react in the same way. Start-up costs change over time because of technological advances. For example, the progression of technologies has reduced the time needed to develop new oil production capacity for producing shale oil. Oil projects which previously took between three and six years to construct can take less than one year to develop (e.g. Shale oil in the US). Compared to previous supercycles, there is now a more significant portion of oil supply that acts more like a standardised manufacturing process than a traditional high-fixed-cost project.
• Secondly, a synchronised increase across many commodities will be challenging to achieve because of the growing focus on environmental concerns. Most countries are now committed to slowing or even reversing the adverse effect of commodity consumption on air, water quality, and the climate, especially after the 21st Council of the Parties agreement on climate change signed in December 2015. As a result, we are likely to witness a significant shift toward less carbon-intensive fossil fuels, with a rising share of natural gas rather than oil or coal, in the long run. In China, the economy is rebalancing away from investment-driven growth toward less commodity-intensive sectors like domestic consumption, especially services consumption. More recently, China has hinted at a steel production cap to curb emissions.
• Lastly, it is improbable that the current upswing in commodity prices will last for 10 years. Those that are pinning their hopes on increased infrastructure spending across the globe will do well to remember the events that transpired immediately after the global financial crisis. After the initial implementation of large, coordinated, fiscal stimulus programs during 2008-09, advanced economies withdrew fiscal support out of concerns for the growth of public debt, and government expenditures fell after 2010. Since then, government debt levels globally have reached historic highs driven by the COVID-19 pandemic. When a government with high debt implements fiscal stimulus, consumers begin to expect that tax increases will follow, leading to decreased consumer expenditure. Creditors have increased concerns about sovereign credit risk, raising sovereign bond yields and, hence, borrowing costs across the whole economy. This leads to lower borrowing by companies, and as a result, reduced investment into the economy. Authorities are rightfully fearful of high debt levels – because they eventually lead to lower economic growth. It might be considered hopeful at the very least to expect meaningful, government-driven infrastructure programs to come to fruition given current debt levels.

Therefore, our view is that the duration of the recent upswing is unlikely to last for a decade. Commodity price increases are also unlikely to occur in a synchronised fashion. Investors should be highly selective in their commodities exposures because talk of a commodities supercycle is more fiction than fact.

Lima Mbeu Investment Managers (Pty) Ltd is an authorised financial services provider in terms of section 8 of the Financial Advisory and Intermediary Act, 2002, FSP number 49018, Registration No 2017/399814/07. This document is for information purposes only. Past performance is not indicative of future performance. The information contained herein is derived from sources which are believed to be reliable. Any opinion expressed herein is based on the presenter’s current analysis and is subject to change. This presentation does not constitute an offer to sell or a solicitation to buy any security. Lima Mbeu has a conflict of interest policy which outlines how conflicts of interest are managed. This policy, as well as additional information about Lima Mbeu’s products, is readily available upon request or on our website: www.limambeu.co.za

For more information, contact Ndina Rabali: Email: ndina.rabali@limambeu.co.za
Tel: 010 023 0113; Address: Fredman Towers, 13 Fredman Drive, Sandton, 2196