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Commodity prices have recovered their losses from last year and, in most cases, they are already above pre-pandemic levels (see Figure 1). The pace of Chinese growth since last year and the economic recovery in advanced economies accompanying vaccine rolls out are seen as driving demand upward, while supply restrictions on some items - oil, copper, and some food products - favored their upward adjustments.
Figure 1 - Commodities price indexes, monthly
Some analysts have started to speak of the possibility of a new commodity price “super-cycle” after the downturn that started in 2010 (Holmes, 2021) (Sullivan 2020). If, on the one hand, there is an expectation that Chinese growth will eventually return to the levels of its “rebalancing”, below that which sustained the global demand for commodities in the previous long price upswing, on the other hand there is the perspective of a strong macroeconomic acceleration in the USA - and possibly also in Europe - driven by public spending packages in green infrastructure.
Why are commodity prices so cyclical?
Commodity prices go through extended periods during which prices are well above or below their long-term price trends. The upswing phase in super-cycles results from a lag between unexpected, persistent, and positive trends to support commodity demand and a typically slow-moving supply. Eventually, as adequate supply becomes available and demand growth slows, the cycle enters a downswing phase.
Individual commodity groups have their own price patterns. But when charted together they constitute extended periods of price trends known as “Commodity Super-Cycles.” Commodity super-cycles are different from occasional supply disruptions, as high or low prices persist over time.
Four distinct commodity price super-cycles since the end of the 19th century can be associated to dramatic structural changes and corresponding growth periods in some regions of the planet.
• The cycle spanning from 1899 to 1932 – with up and down phases - coincides with the industrialization of the United States in the late 19th century.
• The following cycle from 1933 to 1961 reflected the onset of global rearmament before the Second World War in the 1930s.
• The cycle of 1962 to 1995 was associated with the reindustrialization of Europe and Japan in the late 1950s and early 1960s.
• Finally, the one starting in the mid-90s to now was mostly related to the rapid industrialization of China up to its re-balancing phase. The pattern of high growth of the global economy in this recent period was one in which fast-growing countries had a higher proportion of GDP associated to natural resources, i.e., commodities.
Figure 2 depicts the latest super-cycle, as measured by the S&P GSCI spot index, which tracks price movements for 24 raw materials. The abrupt decline in 2015 mainly reflected a sharp downfall of oil prices, as the US shale gas and oil altered the supply landscape. Notice that, after the impact of the pandemic last year, the index has gone up by close to 25 per cent in 2021.
Figure 2 - The latest commodity super-cycle
Some commodities are more equal than others
It is necessary to remember that different groups of commodities have their own histories, reflecting their own conditions of demand and supply. Although it is always possible to find moments of joint fluctuation, in which they remain for a long time above or below their long-term trends and configure the “commodity price super-cycles”, one still cannot lose sight of their differences.
Take the case of oil, whose price plunged last year when mobility restrictions directly impacted demand for its derivatives. Its recent rapid recovery was at a record pace, helped by production cuts by the Organization of Petroleum Exporting Countries (OPEC) and its partners. But the recovery in demand has been gradual and is expected to be steady only over the course of this year, as vaccination unfolds and as travel restrictions begin to be reversed, especially in advanced economies. However, the global level of idle oil production capacity remains high.
Agricultural prices, on the other hand, are 20% higher than a year ago, reaching levels not seen for almost seven years. Price increases were driven by declines in the supply of some food commodities, especially corn and soybeans, strong demand for feed by China and the devaluation of the US dollar. Soy has recently hit its highest price in eight years.
A recent report from the Eurasia Group (Food inflation and rising political risk, May 7, 2021) has called attention to rising political risks associated to recent food inflation in emerging markets. Several factors have accounted for that, including exchange rate depreciation, shipping constraints, logistical difficulties, and weather events.
Figure 3 shows the normalized food inflation rate on the World Bank’s measure of food prices for low- and middle-income countries over the last 30 years. According to this index, food inflation for developing countries was above 37% year-on-year in March, or more than 2.3 standard deviations above the thirty-year mean. The index has matched or exceeded this level only twice in the last three decades, during the “food price crises” in 2007-08 and 2011.
Figure 3 - Emerging-market food prices are rising at a rate matched only twice in the last 30 years
In its April report on commodities, the World Bank suggested factors stabilizing food prices starting next year. According to the U.S. Department of Agriculture's survey of planting intentions, the land allocated for corn, soybeans and wheat in the U.S. is expected to increase next season - especially in the case of soybeans and wheat. This will follow supply growth below long-term trends during the last harvests. Given the US weight in these commodities, if intentions are to materialize, they will help stabilize global food commodity markets.
Agricultural prices are expected to stabilize in 2022, after a 13% increase this year. However, developments will also depend on the trajectory of energy costs in the short term and biofuel policies in response to the energy transition in the long term. Some analysts go as far as saying that the elasticity of agriculture production has become such as to make their cycles more a matter of quantity than prices.
Copper is king!
It is in metals and, especially, in copper that the narrative of a strong bullish cycle has adherence. Prices currently on the rise reflect strong demand in China, the ongoing global recovery, and interruptions in the supply of some metals. In March, copper, tin, and iron ore prices reached a 10-year high (Figure 4).
Figure 4 - Copper prices and global manufacturing PMI
In the years ahead, the infrastructure fiscal package proposed by President Biden in the United States and the global energy transition to de-carbonization will impact demand and price of commodities in different intensities. President Biden's large infrastructure package will favor renewable energies, associated with the use of electric vehicles and batteries. The raw materials needed for batteries and electric vehicle engines - lithium, rare earths - are already experiencing market euphoria. Copper, for its properties of conducting electricity, tends to be used 4 or 5 times more in electric cars than in cars powered by oil products. Oil, for its part, will not be in line with the “green recovery”.
Nicholas Snowdon, commodities strategist in Goldman Sachs Research, argues that because it is “the most cost-effective conductive metal [for] capturing, storing [and] transporting electricity,” copper will be the key metal in the transition to a green economy. “Copper is the new oil”, he says.
As it is typically the case under the classic “super-cycle” conditions, there will inevitably be a delay in the supply response in the case of copper and other metals. It is only now with the return of the USA to the Paris Agreement and the Biden program that the infrastructure "greening" is being taken for real. No major copper investment project has been approved in the past 18 months and such projects take 4 to 5 years to fully operate. Investment losses at the start of the downturn in the past decade have held momentum.
Three things to note. First, even copper scraps are going to be valuable in the near future. Second, it will be interesting to see how copper mining projects that respect environmental, social and governance safeguards (ESG) will have to be built, in order to be in step with the new times. Third, the next time they talk to you about “commodity super-cycles”, ask them which commodity they are talking about.
First appeared at Policy Center for the New South