Commodities are essentially any goods that can be bought and sold, ranging from grain to gold to oil to beef to copper and so on. And the prices of these commodities are not fixed but fluctuate, typically following a cyclical nature.
In recent years, there has been a steady rise in the prices of various commodities. This has not only sparked a debate on how this uptick will impact consumer behavior but has also raised the question of whether the global economy is entering a “supercycle.”
Here’s a brief overview of a commodity supercycle and whether it is something to be concerned about.
As previously stated, commodities typically move through cyclical changes. And if commodities start being traded at above long-term price trends for an extended period, it can be characterized as a commodity supercycle.
A supercycle is essentially a sustained economic expansion period, often lasting more than 10 years, where there is significant demand for services and products. These fluctuations in the prices are significantly higher or lower (bull and bear markets) than their usual long-term rates and last between 15 and 20 years.
However, it should be noted that a commodity supercycle is very rare. Since the 19th century, only 4 commodity supercycles have been identified.
Commodity prices are never constant. So, how do you determine whether it is a supercycle or just a cyclic fall and rise in prices?
A set of criteria must be met for a commodity price fluctuation to be qualified as a supercycle:
- The extent of commodities that the cycle covers must be broad, which means a number of different commodities must experience a change in prices.
- The trend should last for a minimum of five years.
- The change in price must be significantly high — tripled or more.
When the supercycle is a result of an increase in price, it is referred to as a boom cycle or bull market, and when it is a result of a decrease in price, it is a bust cycle or bear market.
According to the study by Bilge Erten and Jose Antonio Ocampo, only four commodities supercycles have been detected, all of which were connected to major historical events and significant economic development.
The first cycle began in the late 1890s and was a result of the industrialization and urbanization of the US. It accelerated during World War I armament, reaching its peak in 1917 and coming to its end in the early 1930s.
The second cycle started after Europe and its allies became involved in World War II, resulting in both Europe and Japan having to go through an extensive reconstruction period. The cycle peaked in 1951 and continued for another decade.
The third cycle was in the early 1970s when the robust economic growth led to a price surge for materials and energy. This cycle lasted until the early 1980s when the prices finally stabilized.
The fourth and most recent supercycle was in the 2000s when China joined the World Trade Organization to modernize its economy. The workers’ mass migration and rapid industrialization caused a building boom and led to China becoming a global consumer and manufacturer. This supercycle came to its end in 2014.
A consistent rise in commodity prices has been observed over the past few years, which has led to discussions on whether we should be expecting a new commodity supercycle.
The increase in prices has largely been the result of economic bouncebacks from the COVID-19 pandemic.
The US has invested trillions to save its economy from the health crisis and to rebuild a better infrastructure. This will require a wide variety of commodities in large quantities. Many such infrastructure spendings are also being observed in China and other countries.
A global transition towards green energy is also on the rise as major economies are switching from fossil fuels to electrical options. This shift toward climate-friendly solutions will result in high demands for many commodities, with copper leading them all.
But, are we really entering a supercycle or just confusing it with a post-pandemic price rise?
Supercycles last for a decade or more. So, it is too soon to classify the current price hike as a supercycle.
A supercycle is defined by its time period, so the rise in prices has to be uniformly high over a long period. Some analysts also argue that the current price hike could be short-lived as the focus of the consumers is more on services than commodities requiring electronics.
Given how long supercycles last, it is a bit premature to try and determine whether we can anticipate one.
Because a huge structural shift is required to drive a supercycle, analysts are uncertain that post-pandemic recovery and green investments will be strong enough to drive a supercycle.