What happened to the commodities supercycle?

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Energy prices continue to soar. Brent crude oil was trading above $82 a barrel this week, a three-year high, after the Opec+ group of producers said it would not add additional production in response to the price spike. US WTI futures are at a seven-year high. On Tuesday Dutch wholesale gas prices went above €100 per megawatt hour for the first time. Prices have more than doubled since the start of September. 

There was much talk earlier this year of a coming supercycle: a prolonged period of rising commodity prices owing to structurally higher demand. Yet while energy markets boom, other commodities have come back down to earth, says William Watts on MarketWatch. US lumber futures gained 600% between April 2020 and May 2021 but are now down by 40% since the start of the year. Copper rocketed to an all-time high in May this year, but has gone nowhere in recent months. Still, in aggregate, commodities are up: the S&P GSCI index of 24 major raw materials has risen by 40% in 2021. 

“Most elements of the supercycle story remain unchanged,” says CME Group on Benzinga.com. The recovery from the pandemic, combined with lavish fiscal and monetary stimulus, should continue to power prices higher. Yet the prospect of coming interest rate hikes and signs that China’s appetite for raw materials is ebbing are sowing doubt. “The jury is still out.”  

Chaos, not a bull market

This year’s price movements look less like a supercycle than simple “chaos”, says The Economist. Stop-start lockdowns and geopolitical tensions are “interacting in unpredictable ways”. For example, “iron ore has cratered” on weaker Chinese steel demand. Yet coking coal, which is also used in steel production, is still “glowing hot” because of a lockdown in Mongolia, a major producer.  

The energy transition is a key element of the case for a new supercycle. Plenty of copper and rare earth metals will be needed to build all the fuel cells and green power grids of the future, Steven Spencer of Spencer Associates tells Lexology.com. But more efficient use of raw materials can bring down demand over time. Higher prices also encourage users to switch to cheaper alternatives: witness “the use of aluminium power cables as a substitute for copper when the price of copper is too high”.  

More efficient use of resources, combined with new exploration, means that commodities are a surprisingly poor long-term investment. Deutsche Bank’s Long-Term Asset Return Study notes that commodities have seen negative real returns of -0.8% per year over the last 100 years. Commodities should provide protection if inflation spikes. But think twice before buying them for your grandchildren’s trust fund.