The return of the commodities supercycle

Copper prices have jumped by more than a fifth this year

(Image credit: © Thomas Trutschel/Photothek via Getty Images)

published 4 December 2020

Prepare for the “revenge of the old economy”, says Ambrose Evans-Pritchard in The Daily Telegraph. Goldman Sachs says we are heading back to the Noughties: a commodities supercycle is beginning. If so, then the current rally in beaten-down stocks may prove to have been the “amuse bouche” for what is to come.

Rising demand hits constrained supply

Copper prices recently hit a seven-year high thanks to soaring Chinese import demand. The red metal has gained 22% in 2020. Brent crude rose by 27% in November and was trading around $48 a barrel earlier this week. Goldman Sachs thinks there is much more to come, says Myra Saefong on Marketwatch. Commodity prices have been caught between hope of a strong recovery next year and lockdown misery in the present. Yet three factors should deliver a roaring 2021 bull market.

First, global demand is likely to be robust in the coming decade. Central bank stimulus remains exceptionally supportive (see page 26 )and there is no appetite for a repeat of the austerity of the 2010s. That will ensure the world has a healthy appetite for copper, steel and oil. Second, as a consequence, inflation risks are rising. A weaker dollar will also boost commodities, which are priced in greenbacks. Thirdly, there has been “structural underinvestment in the old economy”. Supply shortages are so severe that “nearly all commodities markets” are in or close to a deficit – remarkable given how the second wave of Covid-19 is dampening demand.

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Why is supply constrained? Raw materials have been in a bear market for much of the last decade, explains a note by investment analyst Variant Perception. That caused energy firms and miners to slash exploration budgets. Soaring prices encourage more supply but it can take years to get a copper mine up and running, for example. The result is “prolonged periods” of “surging demand” running into “inelastic supply”. That generates a “commodity supercycle”. Add in their inflation-hedging potential and commodities looks “primed to deliver long-term superior returns”.

The shift to battery technology is also driving the new cycle, says Eoin Treacy for Fuller Treacy Money. China, the world’s biggest car market, is intent on going electric so that it can achieve a measure of energy independence. On current trends batteries will be cost-competitive with internal combustion in a matter of years. Electric vehicles need “four times more copper than a conventional car”; charging infrastructure will use up even more of it.

Enthused by electric vehicles, investors have shunned “Big Oil” for fear of losing money in “stranded assets”, says Evans-Pritchard. Back in the “glory days” annual investment in oil was almost $900bn, but it halved after prices slumped post-2014. This year it will be “barely $300bn”. Thus the energy switchover ironically “almost guarantees” an “oil shock”: expect crude to hit $100 a barrel one last time before we are all driving electric cars.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.