Commodity prices have boomed over the last year, boosted by low interest rates and a snap back in global demand. The Goldman Sachs commodity index has risen by 55% from its low and the rally has been broad-based, lifting metals, oil and agricultural commodities.

The fact that prices collapsed last year and have soared this year is not surprising. The economic cycle has a powerful effect on commodity prices, just as it does on the value of equities, bonds and property. With supply relatively fixed in the short term, an unexpected shift in demand can cause sharp moves in commodity prices.

As the scale of the pandemic became clear last April the oil price fell into negative territory for the first time. The price of West Texas Intermediate dropped to -$38 a barrel (the absence of demand and the mounting costs of storage meant producers were briefly prepared to pay buyers to take oil off their hands). This year growth has come back more quickly than expected, and the problem is now one of rising prices and supply shortages. Semiconductor shortages have forced car producers to slow production. In the US the rising cost of building materials, particularly timber and copper, is pushing up prices for new homes.

But could this be more than a normal, cyclical recovery, and the start of a ‘supercycle’, a prolonged period of rising prices? Supercycles are rare; there have been four in the last hundred years. The last one started in the late 1990s driven by demand from China and other emerging economies and by a quickening pace of globalisation. By the eve of the financial crisis, in 2008, commodity prices had quadrupled. That supercycle collapsed with the financial crisis and commodity prices languish at a fraction of their 2008 peak.

Some of the factors driving prices today seem to be here to stay. Reducing carbon emissions will require the use of vast amounts of metals. Electric vehicles require rare-earth metals, such as lithium, but also traditional ones such as aluminium. Silver is widely used in photovoltaic installations while electrification could drive copper demand for years to come. The International Energy Agency (IEA) estimates that a rapid energy transition could require a 40-fold increase in the consumption of lithium for electric cars and renewables, while the use of graphite, cobalt, and nickel for these purposes could rise 25-fold. In their efforts to secure the recovery, governments are also spending freely on traditional infrastructure in a way that will create extra demand for commodities. Meanwhile supercycle enthusiasts argue that the low prices of recent years have held back investment in new commodity capacity, especially in oil and metals, adding to the upward pressure on prices

But there are also reasons for doubt about the supercycle theory. China’s trend growth rate has fallen sharply from the double-digit rates that marked the last supercycle. Then China was building up its heavy industries and infrastructure to cope with a growing population and soaring demand. Today its population is shrinking, and the authorities are seeking to rein in unproductive investment. And while it is true that supply for most commodities is fairly fixed in the short term, this is not true in the medium term. US shale drillers can raise output as prices rise. OPEC is gradually increasing supply. Agricultural production can step up output between seasons.

Today’s commodity upswing starts from a low base. Having hit a 40-year low last April prices have doubled but they are still less than a quarter of the peak reached 13 years ago. In real terms prices are way below levels seen between the late 1980s and 2008. After this year’s heady increases futures markets are pricing a 4% decline in industrial metals prices next year.

Sustained gains in commodity prices seem most likely in areas related to the energy transition. Yet the case for a broad commodity supercycle is not overwhelming. Many supply problems seem likely to be overcome. China is at a very different stage of its development today than it was 20 years ago. For now at least this commodity cycle looks more ‘normal’ than ‘super’.

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