The return of the commodities supercycle

With copper prices recently hitting a seven-year high, we could be heading for a new commodities supercycle.

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.

The green transition 

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.

Recommended

The hidden cost of employee share schemes
Investment strategy

The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.
26 Sep 2022
Sterling crashes to its lowest since 1985 after mini-Budget
Currencies

Sterling crashes to its lowest since 1985 after mini-Budget

The pound has fallen hard and is heading towards parity with the US dollar. Saloni Sardana explains why, and what it means for the UK, for markets and…
23 Sep 2022
Earn 3.7% from the best savings accounts
Savings

Earn 3.7% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
23 Sep 2022
Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022

Most Popular

Could gold be the basis for a new global currency?
Gold

Could gold be the basis for a new global currency?

Gold has always been the most reliable form of money. Now collaboration between China and Russia could lead to a new gold-backed means of exchange – g…
22 Sep 2022
Paypal, bitcoin, and the weaponisation of money
Bitcoin & crypto

Paypal, bitcoin, and the weaponisation of money

Recent events have shown how both business and governments can “weaponise” money and shut down dissent. What to do? Buy bitcoin, says Dominic Frisby.
22 Sep 2022
Why you should short this satellite broadband company
Trading

Why you should short this satellite broadband company

With an ill-considered business plan, satellite broadband company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short th…
23 Sep 2022