The recent upswing in global commodity prices has provoked suggestions that another ‘super-cycle’ could be in offing. There are certainly similarities with the recovery led by mainland China from the 2008-09 global financial crisis, but there are differences too.

In real terms, global commodity prices rose steadily from 2002 until mid-2008, peaking at 168 per cent above their 1990s average. The financial crisis saw a sharp decline, but the weakness was short-lived: a massive boost to infrastructure and housing construction by mainland China substantially increased demand for materials. By 2011, prices were back to 155 per cent above their 1990s average and falling global interest rates encouraged investment in commodities.

Then, metals prices slid from 2012 as Beijing’s stimulus faded and investment in new capacity boosted global commodities supply. The super-cycle’s end was sealed when OPEC increased oil supply. By early 2016, real commodity prices were back to the low levels of the 1990s and the super-cycle was over.

Some markets remained strong − iron ore and copper prices have stayed well above their 1990s levels in recent years and are now at seven-year highs − but by 2018 the overall commodity price index had still only reached 55 per cent above the 1990s average. Such a cycle was hardly ‘super’.

Then, in 2020, COVID-19 and more OPEC supply drove another cycle, returning global commodity prices to their 1990s lows in real terms before a partial bounce.

However, as the world economy recovers, momentum is building for some commodities, particularly metals, as construction and manufacturing, rather than services, lead the upturn.

Consequently, some key factors are falling into place to support a sustained commodity-prices upswing. Mainland China is leading the recovery, while Western governments prepare to boost spending on infrastructure, particularly electric vehicle networks. And global interest rates look set to stay low.

But we think another super-cycle is unlikely.

True, Beijing’s initial response to the pandemic − as in 2008-09 − was to promote infrastructure, but then debt levels were low, allowing significant spending. Now debt is much greater and policymakers are cautious.

And the last super-cycle upswing occurred when the metals intensity of mainland China’s growth was rapidly rising: now growth has been rebalancing towards services sectors.

Under-investment in capacity to produce resources was a key factor in the early 2000s super-cycle and, since 2012, there has again been low investment in the sector. However, there has been investment in energy commodities − particularly new refining and liquid natural gas capacity − if not in oil.

The US shale industry was in its infancy before 2008. Producers may now be able to respond more quickly to price rises.

Meanwhile, one surprising aspect of the COVID-19 crisis is how little disruption there has been to agricultural supply chains and the lack of price volatility. Grain prices rose steeply in the last super-cycle, but this time high stockpiles have largely provided a cushion from supply shocks.

As such, a commodities upswing is underway, but the lessons from previous super-cycles suggest today’s cycle is likely to be less ‘super’ than the last one.

First published 15 December 2020.

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