Clues to when the next commodity boom will start abound – if you know where to look

It’s important to understand that the boom phase of a commodity cycle doesn’t kick off overnight.

While there have been some green shoots — record gold prices, and copper (briefly) spiking into new all-time highs in 2024, we’re still not in what I’d consider ‘boom conditions.’ That applies especially to junior mining stocks, many of which still trade close to all-time lows.

So, how does China’s recent stimulus, which was announced in September and included rate cuts and lower reserve ratios for banks, fit in with our overall outlook on the emerging commodity cycle?

While important, numerous factors must be in play to help stage stronger prices in the commodity market. So, how close are we to a more bullish phase?

One metric that can help us understand our position in the overall commodity cycle is to look at spending on exploration and new mine development.

Not surprisingly, capex tends to rise alongside higher commodity prices. As much as it would make sense to develop projects during a downturn when capital is cheap and labour is easy to access, this rarely happens in the mining industry.

Higher prices are the catalysts that spark growth ambitions for the miners, so capex investment follows the boom-and-bust commodity price cycle.

The promise of future rewards is a powerful driver in the industry —from companies to investors to lenders.

And today, investment remains subdued.

To illustrate what I mean, let’s examine a graph from the Australian government’s latest quarterly resource and energy outlook:

As you can see, exploration (light blue) and mining capex (dark blue) are well below their cyclical highs in inflation-adjusted terms.

Looking at the surging activity from the peak of the last boom (2011) should give you some context on what’s been playing out over the last few years.

Activity in the sector remains muted and far from a cycle high. But investment activity has been trending higher since the cyclical low in 2016.

While conditions might not be described as bullish, they are strengthening.

Capex clues

To understand why investment in new development is important for understanding our position in this commodity cycle, we need to revisit how these cycles operate.

Underinvestment in new supply offers a floor for commodity prices that holds firm because of limited supply. The graph above shows this ‘underinvestment phase’ has existed from 2016 to 2024.

This muted activity follows the hyperbolic investment phase that culminated in 2011/2012.

Since the lows of 2016, the sector has been recovering. But until meaningful demand returns, the cycle will be stuck in limbo, somewhere between bullish and bearish.

That gives mixed messages, offering no clear direction for investors.

But the key point is this: The stage is set.

Underinvestment over the last decade has offered a floor (structural support) for commodity prices.

Copper: A commodity leader

Minerals tend to ebb and flow throughout the upward leg of a cycle. As one metal hits a major high, others could be hitting major lows. The performance of gold versus iron ore in 2024 is a good example.

But in terms of specific commodities, as long as the long-term trend remains, there’s no need to pay too much attention to short-term pressures. Here, we can use copper as an example.

On the chart below, you can clearly see copper prices trending higher over the last five years:

And that’s despite numerous setbacks to global growth over that time. Pandemic, rapid interest rate rises, a surging U.S. dollar, wars, real estate and stock market collapse in China and global recession fears.

Copper, a commodity with its fortunes pegged to global growth, has climbed an impossible wall of worry.

China stimulus: will it ignite the cycle?

Markets have a short memory and tend to overreact to economic developments, either up or down.

Recall that in August 2024, authorities in China revised GDP growth below their long-term target of 5% per annum.

That drove a wave of panic across markets, especially those tied to commodities.

To make matters worse, steel producers in China responded with production cuts.

As a major buyer of Australia’s most important export, iron ore prices dived below the key support level of US$100 per tonne.

By September, several of Australia’s largest mining firms had hit multi-year lows as any thoughts of a looming commodity supercycle vanished.

If you bought into that panic, you would likely have sold out close to a major low. But as I explained at the time, the key metric to watch was still intact: China’s imports of raw materials.

That’s a data point that’s difficult for Chinese authorities to manipulate.

Despite deep pessimism over August and September and a wave of selling in commodity markets, imports of key commodities like iron ore remained robust.

In fact, the latest data has confirmed iron ore imports jumping 6.7% in H1 2024 compared to the same period in 2023! That’s according to the Chinese Steel Association (CISA).

So, what happens next?

From here on, it’s pure speculation on what could happen next in the resource market.

As I’ve shown you, copper continues to trend higher. Capex and exploration spending are also building despite years of underinvestment.

The market is ripe for higher prices, and China’s latest move should give you every reason to be optimistic.

It aligns precisely with the progression of a typical commodity cycle: a period of underinvestment, consolidation, rising optimism, and then boom!

The inevitable turning of the cycle is underway. And right on cue, the U.S. Federal Reserve has initiated rate cuts.

This will send more liquidity into markets and stimulate the U.S. economy while weakening the U.S. dollar. Each of these offers bullish tailwinds for commodities.

— James Cooper is a geologist based in Australia who runs the commodities investment service Diggers and Drillers. You can also follow him on X @JCooperGeo.