The commodities “supercycle” pauses for breath

Commodity prices have all surged this year as economies have reopened. But now some raw materials have started to come off the boil.

The commodities supercycle is facing its first real test. The prices of metals, agricultural products and oil have surged this year as economies have reopened. That has prompted talk of a new “supercycle”: a prolonged period of rising prices caused by structurally higher demand. Commodities cycles are driven by the fact that suppliers cannot react quickly to rising prices. “It takes roughly ten years to build a new copper mine,” Matthew Fine of Third Avenue Management told Myra Saefong in Barron’s. 

Some raw materials have started to come off the boil. Soybean futures have lost all of their gains for 2021, while corn, platinum and nickel have also retreated, say Yvonne Yue Li and Marvin Perez on Bloomberg. US timber prices had gained 400% in a year, but have fallen by more than one-third over the past month. Not all commodities have dipped. The likes of tin and oil remain buoyant. Brent crude futures hit a two-year high of $75 a barrel this week.  

Copper price goes into retreat

Copper, a crucial ingredient in the green transition, was billed as the star of this supercycle. The metal is down by 15% since hitting an all-time high last month, although it has still gained 14% since the start of the year. Copper has suffered a “one-two punch” from the US and China, says Nathaniel Taplin in The Wall Street Journal. Hints of tighter monetary policy and doubts about President Biden’s infrastructure bill, which is being delayed by congressional bickering, could mean US demand proves weaker than predicted. Meanwhile China has been clamping down on commodity speculation and released copper, aluminium and zinc from its strategic stockpiles in a bid to keep a lid on prices. The country consumes half of the world’s refined copper. It would be premature “to say prices have peaked for the cycle. But the next few months could get rocky”. 

Government interventions in commodity markets don’t always work, says Udith Sikand for Gavekal Research. While policy tweaks can have a decisive impact in many asset markets, commodities track “fundamental demand-supply conditions”. Many metals markets are tight. London Metal Exchange data on inventories shows that “for a lot of commodities, stockpiles are near their lowest levels in well over a decade”.  

“The bullish commodity thesis… is about scarcity and strong physical demand”, says Goldman Sachs. They think Brent crude could average $80 a barrel over the third quarter of this year and that a deficit in the copper market looks likely to last into next year. This could be a “buying opportunity”.Roaring commodity markets got carried away this spring and were due a correction. But, says Sikand, “the pullback…looks more like a pause than a fundamental reversal”.

A meltdown in the uranium market

Investors in the uranium market are having a “meltdown”, says Jinjoo Lee in The Wall Street Journal. A “performance issue” reported at China’s Taishan nuclear power plant has sent prices of uranium miners down by 10%. The incident seems to have been a “routine operational issue”, with “no abnormal radiation” reported in nearby Hong Kong or Macau. Any story involving the words “nuclear” and “leak” gives investors painful flashbacks to the 2011 Fukushima nuclear disaster. That incident precipitated a long-term drop in nuclear fuel demand as countries such as Germany began to de-nuclearise. 

Global nuclear electricity generation “has recovered over the last five years to pre-Fukushima levels”, says Eoin Treacy of Fuller Treacy Money. Decarbonisation will bring “a significant increase in demand for electricity” over the coming years. Nuclear fuel is a “proven reliable zero-carbon” energy source that could provide power when renewables are not running. Nuclear energy is “the second-source of low-carbon electricity in the world behind hydropower”, say Nilushi Karunaratne and Alex Hamer in the Investors’ Chronicle. Yet it is often overlooked in favour of wind and solar. “Electricity generated by nuclear is expected to rise by a third between now and 2050”. The market currently has a “huge supply deficit”, although stockpiles are keeping a lid on prices for now. 

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