New Age of Scarcity - Dawn of A Commodities Investment Supercycle - Article | Crux Investor (2024)

A commodities supercycle refers to a prolonged period during which most base metal and mineral prices rise significantly and remain elevated for over a decade. The rising demand for commodities due to rapid industrialization and urbanization in emerging economies combined with supply constraints leads to tight market conditions and higher prices.

There have been 4 major metals commodities supercycles over the past century, driven by waves of infrastructure growth and economic development. The most recent supercycle started in the early 2000s, driven largely by China's rapid industrialization and unprecedented urban migration. At its peak around 2011, copper and iron ore prices had risen over 300%, while coal prices rose over 200% compared to the early 2000s.

This supercycle came to an end around 2014 as China's infrastructure boom slowed down. However, we are now on the cusp of a new commodities supercycle as major trends like decarbonization, electrification and infrastructure renewal converge to drive metal demand. Here are some key factors that make a compelling case for a new metals bull market.

1. Decarbonization policies: Countries around the world are aggressively pursuing net zero emission targets, involving switching from fossil fuels to renewable energy sources. This energy transition is extremely metal-intensive, requiring large quantities of copper, nickel, cobalt and lithium for electric vehicles, wind turbines, solar panels and grid infrastructure. Copper demand could grow by over 600% by 2050 in some decarbonization scenarios. New mines take 1-15 years to come online, leading to long-term shortages.
2. Post-pandemic infrastructure investment: Infrastructure stimulus packages launched in the US, Europe and China are focused on the renewal of aged infrastructure. President Biden’s infrastructure bill alone involves $550 billion in new infrastructure spending. Building renewable energy systems, EV charging stations, 5G networks, high-speed rail, new ports, bridges etc. is set to drive significant metal demand.
3. Supply-side constraints: New mines can take well over a decade to develop due to permitting issues and costs. Older mines are also getting depleted rapidly. Capex by top miners has lagged behind rising metals demand over the past decade. This limits potential supply response, prolonging shortages rather than correcting them quickly. Environmental opposition also makes opening new mines much harder now.
4. Urbanization in emerging economies: Despite the recent China slowdown, countries like India, Southeast Asia, Latin America and Africa are rapidly urbanizing and industrializing now. Hundreds of millions are expected to migrate to cities in these regions over the next 20 years. Housing, appliances, autos, rails, power - nearly everything requires more metals per user in an urban versus rural setting.

Timeframe for the supercycle

Most analysts expect this supercycle could last through the 2030s, given the prolonged nature of the demand drivers and supply-side barriers. However, prices will be volatile through cycles. Investors should realistically take a 5-10-year view rather than expect a linear rise. Periodic dips of 20-30% are likely even in a long-term bull market.

Implications of a Commodities Supercycle for Investors

A supercycle implies strong tailwinds for metals and mining stocks over the next decade. Shareholder returns have averaged 29% annualized during past supercycles. Investors should overweight the sector through miners, streamers and royalty companies or dedicated metals funds. Top picks tend to be copper, nickel and lithium miners with low-cost production, growth optionality and disciplined capital allocation. Battery metal streams and royalties also offer exposure to rising electrification demand. Avoid high-cost producers at the top of the cost curve.

With multi-year underinvestment in new supply, the stage seems set for a prolonged period of commodity shortages. The convergence of several demand catalysts makes this bull cycle fundamentally different from a stimulus-driven temporary spike. Positioning early for the oncoming surge in metals demand could lead to outsized gains for investors over the next decade. However, given price volatility, patience and periodic profit-taking are recommended rather than betting the farm on a short-term parabolic rise.

Actionable advice on how to benefit from a Commodities Supercycle

Here are some actionable tips for investors seeking to benefit from a potential new commodities supercycle:

1. Gradually build exposure over 6-12 months rather than rushing in. Commodities like metals and energy can be volatile, so dollar-cost averaging reduces timing risks.
2. Gain diversified commodities exposure through ETFs tracking a commodities index rather than buying individual contracts. Funds like DBC, GSG or GCC avoid concentration risks.
3. For more aggressive positioning, overweight oil and metal miners with promising assets, low costs, strong balance sheets and M&A appeal. Avoid marginal producers.
4. Consider exchange-traded futures for short-term tactical plays during supply squeezes. But limit allocation - contango effects tend to discourage long-term holds.
5. Evaluate streaming/royalty companies like Wheaton Precious Metals and Franco-Nevada for commodity leverage without operational risks of miners.
6. Reinvest a share of profits when prices surge above production costs to capitalize through the cycle. Similarly, partial profit-taking after sharp spikes preserves gains.
7. Keep 6-12 month tactical hedges in place where possible. Trimming profitable positions ahead of demand slumps and Fed rate hikes could cushion portfolios during inevitable corrective phases.

The key is spreading out capital at regular intervals to avoid timing risks, maintaining a risk-balanced portfolio, and riding the structural upside over a 5-10 year investment horizon while buffers against short-term volatility.

How do I invest in a metals supercycle?

Here are some tips for investors looking to invest in a metals commodity supercycle:

1. Invest in mining stocks. Mining companies with large, low-cost reserves of metals used in electric vehicles and renewable energy infrastructure like copper, lithium, and nickel are well-positioned to benefit from rising prices during a commodities supercycle. Majors like BHP and Rio Tinto as well as junior miners offer leverage to underlying metal prices.
2. Consider diversified mining ETFs. Rather than picking individual companies, funds like the SPDR Metals and Mining ETF (XME) provide diversified exposure by holding a basket of mining stocks. This allows participating in a supercycle while mitigating company-specific risks.
3. Evaluate streaming/royalty companies. Companies like Wheaton Precious Metals and Franco-Nevada provide financing to miners in exchange for rights to future production. This gives them commodity price exposure without operational risks, and royalty revenues can rise sharply when metals enter a strong bull market.
4. Target specialty metal ETFs. Funds focused on a single metal like the Global X Lithium ETF (LIT) or ETFMG Prime Junior Silver ETF (SILJ) offer targeted exposure to metals that may outperform during an electric vehicle-intensive supercycle.
5. Maintain allocation to base metals. Even metals like copper, aluminum and zinc will see strong demand growth from infrastructure building and rising consumption needs in emerging economies during a commodities supercycle.
6. Consider timing and price dips. Metals tend to move in cycles so patience is required. Periodic price corrections allowing for more attractive entry points may arise even in prolonged bull markets.

Diversification, patience and prudent position sizing are key while investing in cyclical and volatile metal price surges driven by a speculative supercycle.

What is the typical commodity cycle?

The typical commodity cycle refers to the boom and bust pattern that commodity prices tend to follow over time. A typical commodity cycle has the following phases:

1. Contraction phase: This is when prices are low due to excess capacity and oversupply. Producers cut capacity as prices fall below production costs. This leads to eventual supply correction.
2. Recovery phase: As excess capacity is shut down, supply tightens while economic growth boosts demand. Scarcity after a contraction phase causes rising utilization rates. Prices start responding, allowing producers to ramp up again.
3. Expansion phase: Seeing higher prices, producers invest to expand operations. But supply growth lags as new mines/wells can take years to build. Demand may also accelerate. This supply-demand imbalance sends prices sharply higher.
4. Overheating phase: High prices incentivize massive investment, flooding the market with excess capacity over time. Eventually, supply races well ahead of demand as all projects sanctioned come online together. Prices crash as neither demand growth nor stockpiles can absorb all this excess. Excess capacity eventually shuts, taking the market back to the contraction phase.

So in summary - tightening of initially oversupplied markets takes prices higher until too much investment creates its own glut, sowing seeds for the next downturn. The exaggerated response of supply and demand to pricing signals leads to this intrinsic cyclicality in most commodities.

The cycle duration depends on the commodity but averages around 5 years from peak to peak or trough to trough. However, supercycles can prolong expansions over a decade when structural shifts multiply demand. The amplitude of price swings between contraction and overheating can also vary dramatically.

When Have There Been Metals Commodities Supercycles in the Past?

There have been a few major metals supercycles over the past century, but they do not necessarily occur with regular frequency or predictable timing. Some details:

1. 1915-1921: This metals boom was driven by World War I military production needs followed by postwar reconstruction across Europe. Metals and minerals prices rose rapidly but crashed soon after the war demand peaked.
2. 1933-1937: Prices recovered in the 1930s after the Great Depression on rearmament spending ahead of World War II. This militarization drove sharp gains in steel, iron ore, coal and other metals. The boom ended with a recession in 1938.
3. 1949-1957: The long economic expansion after WWII fueled by the reconstruction and industrialization of Japan and Europe led to this commodity supercycle. Aluminum, copper, steel and energy prices rose through the decade before ebbing.
4. 2003-2011: The enormous urbanization of China over this period propelled global metals and minerals demand to unprecedented levels. Iron ore, copper, oil and coal hit record-high prices before trends reversed after 2011.

So in the past century, supercycles have mostly arisen unpredictably from wars, global rebuilding efforts and rapid industrial expansions. This makes timing them in advance nearly impossible. Many experts think the 2020s may see another surge, but this remains speculative at this stage. Commodity investing requires patience and willingness to ride out volatile cycles.

When was the Last Commodities Supercycle?

The last commodities supercycle occurred over the period spanning roughly 2003 to the early 2010s, with most commodity prices peaking around 2011 before declining. Some key details:

• This supercycle was largely driven by rapid industrialization and urbanization in China over this period, as it invested heavily in infrastructure and housing, becoming the world's largest consumer of most major commodities.
• Commodities such as crude oil, copper, iron ore, steel and coal saw massive spikes in demand and prices due to Chinese growth, with commodity prices rising as much as 500% from theearly 2000s to their 2011 peaks.
• Copper prices for example quadrupled from low $1,000s per metric ton in 2001 to over $4.60/lb ($10,000 per ton) by February 2011. Iron ore shot up from $12 per tonne to $187 per tonne by early 2011.
• Oil rose from an average of $25 per barrel in the early 2000s to over $100 per barrel by 2011, with coal and natural gas prices seeing similar exponential gains over the decade.
• The supercycle started unwinding by 2011 as the Chinese infrastructure boom cooled off, signaling a peak in commodities intensity of its growth. This caused a major correction in global commodity markets.

So in summary, the 2003-early 2010s supercycle was unprecedented in scale at the time and remarkable for the degree of price appreciation in a short span, driven by the epic expansion in resource-hungry China. A convergence of factors has leading analysts to call an impending new supercycle.

What causes a commodities supercycle?

Some of the main economic factors that typically drive an extended commodities supercycle spanning a decade or more include:

1. Industrialization and Urbanization of Populous Nations: When very populous developing nations like China or India accelerate infrastructure build-out and urban migration, commmodities demand shoots up for housing, autos, machinery, appliances etc. This happened with China in the 2000s supercycle.
2. Prolonged Underinvestment in New Supply: If existing mines and oil wells become depleted faster than fresh capacity can be built, it causes structural shortages leading to price spikes. Permitting barriers and costs can deter new projects.
3. Global Coordinated Infrastructure Spending: When governments across the world simultaneously invest in new infrastructure, it spurs growth and commodities demand. This is expected post-2020 pandemic recovery stimulus.
4. Transition to Clean Energy Sources: The shift from fossil fuels to renewables and electric transport requires significantly higher intensities of copper, lithium, nickel, cobalt relative to energy and mobility demand. A net-zero transition would necessitate a surge in mining.
5. Supply Chain Disruptions: Covid-related shutdowns showed the fragility of global supply chains to even brief logistics breakdowns, yielding shortages. More nations may onshore production or stockpile reserves as a buffer going forward.

Essentially, commodities supercycles occur when an enduring, structural shift leads to a step-change in demand against relatively inelastic supply, made worse by long lead times to activate new capacity. Geopolitical risks can also constrain certain critical mineral supplies. This dynamic could last over a decade resulting in a pricing supercycle.

How long do commodities supercycles last?

Historically, commodities supercycles have tended to last between 5 to 10 years from the onset of the uptrend to the peak. Some examples:

1. 1915-1921 supercycle: Lasted about 7 years from the outbreak of WWI to the post-war crash in industrial and metals prices.
2. 1933-1937 supercycle: Lasted just under 5 years as this commodity boom aligned with pre-WWII re-armament and the Great Depression recovery after 1933. Ended with another recessionary dip.
3. 1949-1957 supercycle: This post-WWII reconstruction-driven boom lasted around 9 years as demand stabilized in the late 1950s and atomic energy started displacing coal and oil.
4. 2003-2011 supercycle: Spanned about 9 years as well from the early 2000s surge in emerging markets industrialization to the 2011 peak when Chinese infrastructure growth began cooling.

The average has been around 10 years from start to a market top. However, some analysts argue the duration of commodities supercycles has become longer in recent decades as transitions like decarbonization and technological transformation in mining take more time.

Additionally, the current consensus is that while specific commodities may peak and correct periodically within the next 10-15 years, the broader multi-year bull market could continue due to enduring structural changes. These include the renewable energy transition, re-shoring of production, and bottlenecks from years of underinvestment in new supply. Policy pivots also play a role in elongating cycles.

So an investor timeframe of at least 10-15 years is reasonable while positioning for the current commodity upcycle driven by shifts towards electrification, decarbonization and localization of supply chains. Periodicity of individual commodity price cycles will continue nonetheless.

Will commodities prices rise in 2024?

Most market analysts expect commodity prices across the board to continue rising through 2024,driven by a confluence of factors:

1. Post-pandemic infrastructure spending: Governments globally will continue investing heavily in infrastructure projects like renewable energy systems, EV charging networks, rail & public transport upgrades etc. Such investments are metal-intensive.
2. Supply-chain constraints: Years of underinvestment in new mines and oil/gas projects have limited supply-side flexibility, with low inventories unable to meet demand rebounds. Permitting barriers also hamper quick supply activation.
3. War fallout: Russia's invasion of Ukraine has led to sanctions constraining Russian oil, gas and metals supply. This contributes to tight markets. Additionally, the conflict is spurring more stockpiling and localization moves.
4. Climate transition momentum: Policies promoting renewable energy and electric mobility adoption globally are sharply raising demand for copper, lithium, nickel and cobalt. Most projects take well over 5 years to come online.
5. Weaker dollar outlook: With the Fed potentially pausing rate hikes by end-2023, the US dollar may peak allowing commodity prices to rise in dollar terms. Weather events and geopolitical crises are also likely to spur intermittent spikes.

While metal and energy prices will remain volatile through 2024, the structural tailwinds point to an upward bias. However, gains may moderate from 2025 onward as recession risks pick up and new supply comes online. But the broader commodities bull run likely still has momentum through the latter half of the decade before peaking.

Which commodities are most cyclical?

The most cyclical commodity sectors that experience regular boom and bust price cycles based on macroeconomic conditions and capacity utilization levels are:

1. Base Metals: Copper, aluminum, zinc, lead, nickel, and tin prices follow economic growth cycles very closely as industrial activity levels impact demand. They boom when capacity tightens.
2. Bulk Commodities: Iron ore, metallurgical and thermal coal, as well as fertilizers like potash move in tandem with construction, manufacturing and agricultural sector activity. Supply flexibility moderates their cycles.
3. Energy Commodities: Crude oil, natural gas and refined petroleum products tend to track the overall economy's expansion and contraction cycles. Their prices exponentially rise and fall with small demand/supply gaps.
4. Precious Metals: Gold, silver and platinum have a cyclical component correlated to economic uncertainty. But they also behave as safe-haven assets and reserves of value, giving them added complexity.
5. Agriculture Commodities: Grains, edible oils and soft commodities like corn, soybeans, wheat, cocoa, coffee and sugar are very vulnerable to weather impacts and supply gluts/deficits making harvest-to-harvest production variability high.

On the other hand, commodities like lithium, cobalt, rare earth metals have emerged as structural growth stories due to clean energy transitions and rising technology uses. Their prices follow more secular trends based on incremental annual demand.