Economists are tracking a broad economic recovery across the globe that appears to be gathering momentum and commodity prices are trading at healthy-to-stratospheric levels amid recovering demand from the Covid-19 pandemic, escalating geopolitical tension between the world’s industrial juggernaut China and key mining nations like Australia, and circumstantial supply-side issues.
On May 12 iron ore prices surged to a record US$237.57 per tonne and copper broke out of a decade-long rut on May 7, as metal for delivery in July gained 3.2%, with futures trading at a record US$4.75 per lb. (US$10,470 per tonne) on the Comex market in New York, compared with the 2011 record of US$4.50 lb. (US$10,190 tonne).
Unprecedented infrastructure-focused stimulus packages add a new layer of incremental demand growth to already generally bullish commodity fundamentals, and in recent quarterly conference calls the world’s mining majors boasted of record revenues, cash flow and returns to shareholders.
Surging prices are leading some to be believe that the market is entering a new commodity supercycle – when prices climb for years if not decades. The analogue is the largely Chinese-driven supercycle of 2002-2008, when the country pushed industrialization and urbanization, and its gross domestic product expanded annually at a percentage rate in the low to mid-teens.
An employee at Glencore’s Lomas Bayas copper operation in Chile. Credit: Glencore.
But most analysts The Northern Miner interviewed are not so sure we are there just yet, with some arguing a real supercycle is only likely to emerge in about three to five years from now as the transition to the green economy firmly takes hold.
Julian Kettle, Wood Mackenzie’s senior vice president and vice-chair for metals and mining, is one of them.
“Not so fast,” he says, noting that while specific commodity markets are trading above fundamentals, the fundamentals themselves don’t yet justify current prices.
“We see it for a range of the commodities because you’ve had so much momentum,” he says in a telephone interview. “You always get a strong recovery following a recession. But the key question is, do we think that can be sustained going forward in terms of GDP growth? And the answer is no.”
“Historically, post-recovery growth is not sustained, ever. The second thing is that much of that growth we’re seeing is based on debt, which has to be repaid. Also, we’re already seeing inflation coming back into the system. And whilst central banks will allow some inflation, if commodity prices have doubled, it won’t allow that inflation to take hold. Central banks will raise rates, which subdues growth. But give it about three to five years and the energy transition will really start to take hold. Some commodities will certainly be in supercycle territory — others will be in super-slump territory.”
Aurelia Britsch, head of commodities at Fitch Solutions, broadly agrees, saying commodity demand has generally just caught up with last year’s Covid-19 shocks.
“Although supply and demand drivers will be positive for certain commodities such as copper, nickel and iron ore in the near term, over the coming years, an expected slowdown in Chinese growth, combined with the rebalancing of the economy towards private consumption, will see the demand for industrial commodities slow,” she says.
Fitch believes that while some commodities such as copper will face a deficit from a supply perspective, many commodities will see supply growth and have higher inventories relative to demand going forward.
“That said, the transition towards a greener global economy poses upside risks to commodity demand in certain sectors, while stronger-than-expected GDP growth in India also poses upside risks to commodity demand,” says Britsch, and strong growth from new demand sources likely sketch a bullish future backdrop.
For Ronnie Cecil, principal analyst for metals and mining research at S&P Global Market Intelligence, bullish investor sentiment has been a critical driver of surging metal prices as the rollout of Covid-19 vaccines sees major economies emerge from lockdown restrictions. But that isn’t the hallmark of a new supercycle and could be more akin to the post-2009 financial crisis, when government stimulus drove commodity prices sky-high, before they started to taper after 2012 and cratered in 2014 and 2015 as more supply came through the pipeline.
Iron ore piles at Rio Tinto’s Pilbara operation in Australia. Credit: Rio Tinto.
“We expect the impact of recovery optimism on metals prices to wane into 2022, as economies normalise activity post the Covid-19 crisis,” he says. “Currently, we do not feel that the recent sharp price increases seen for iron ore and copper mark the dawn of a new supercycle.”
The analyst expects the pace of metals demand growth to moderate next year as government stimulus is tapered globally and new supply comes on stream.
“The next few years is also expected to see a wave of projects boost copper supply through expansions such as BHP’s Spence copper mine expansion and new start-ups like the Kamoa-Kakula copper project in the Democratic Republic of Congo,” he says. “Brazilian iron ore exports are also expected to recover as shuttered capacity reactivates. High metals prices provide a strong incentive for a supply response.”
As for WoodMac’s Kettle, he believes that if a supercycle does emerge, “it will be thematic-driven and not a single country driving the commodities boom.”
“I think there’s been a little bit of confusion between transient factors and structural,” he says. “Nobody argues that the energy transition is going to be fantastic for someone commodities – it’s going to be truly awful for others.”
By contrast, in the last supercycle, all commodities benefited and were driven by China’s heavy investment in infrastructure and industry.
Kettle says there is a broad understanding and acceptance that the world currently has as close to synchronous recovery and synchronous growth as one is ever going to get. Adding fuel to the fire is that governments want to build back better and greener.
The analyst notes that China’s current five-year plan sees a tilt away from infrastructure spending towards consumer spending, further deflating the long-term drivers necessary for a supercycle to take hold.
there is a lot of analysts blabla.. the industrial demand is actuall huge.. electrification is everywhere from windmils to solar to cars to electronics to scooter even cycles and high current needs higher amount of copper. Even cooling pipes need copper. Copper supply isn’t oil supply the only regulating factor are interest rates and the speed of China and they have to go further if western countries planning together. This will be a Super-Cycle but perhaps not a linear.. electronics evolution including digital coins are adding demand. Copper is the future and if we get better batteries until 2026 there will be even bigger demand.
What do you call 500 economists at the bottom of the ocean? “A GREAT start!”
( borrowed that from the lawyer joke book but it’s every bit as apropos here )