Commodity prices have risen at the fastest rate in more than 30 years – up over 70 per cent in the year to April. Metals such as copper and iron ore have led the increase but oil is back above pre-pandemic levels and agricultural prices have risen too. Are we seeing another ‘super-cycle’?

The early-2000s super-cycle saw global commodity prices rise by 320 per cent between 2002 and 2008 and remain high until 2014. There are similarities this time around – but also key differences. Mainland China is again leading the upswing and there has again been an extended period of subdued mining investment and low interest rates. But mainland China’s growth is now coming more from services, which are far less metals-intensive than construction.

Metals have led the current recovery, supported by mainland China ramping-up of infrastructure spending. However, that is expected to slow in the first half of 2021, and metals demand is unlikely to be fully offset by Western investment, despite the US fiscal plans. And vaccine roll-outs will see a global demand pivot from goods to services.

Supply constraints have boosted oil prices, but US shale oil, where supply response is more nimble, is now a much larger part of global oil supply.

Demand for oil is gradually recovering but remains well below pre-pandemic levels. The pandemic will change our demand patterns permanently though. In particular, working-from-home will accelerate digitalisation and reduce travel – with implications for oil demand.

The COVID-19 shock and the government spending programmes it prompted – plus a new US administration, the European Green Deal and Beijing adopting a net-zero target – have also bolstered the momentum in global climate-change policy. These moves will profoundly impact commodity markets. Demand for high-carbon-emitting commodities such as coal and oil, will fall, even if low investment in coal mines and oil projects limits near-term supply.

Climate concerns have spurred an electric revolution that is boosting demand for materials such as copper, lithium and cobalt used in batteries and electricity networks.

Meanwhile agricultural-product prices have risen strongly, led by cereals, especially soybeans and corn. This largely reflects dry weather in South America reducing yields, but the La Niña event responsible is expected to continue in coming months.

Mainland China’s demand for farming products has been strong, particularly for imported grains used as feedstock to rebuild a pork herd that swine fever reduced by one-third. That supply loss has re-shaped global meat markets, leaving prices at multi-year highs.

Of course, although commodity prices tend to move together, individual commodities can defy the trend. The prices of some key commodities – including iron ore and copper – remained well above their 1990s’ averages even after the end of the last super-cycle. Overall though, because of the differences between now and the 2000s, particularly for oil and metals, we suspect that a new super-cycle is unlikely.

First published 10 March 2021.

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