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Business Activities / Extractive industries

Opinion: Caution to those who surf the commodities super cycle wave

The emerging super cycle in commodity markets has many people excited, but those tempted to full-on embrace this boom would be well advised to look more closely at the circumstances surrounding it.

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Iron ore is widely used in the auto industry to limit emissions and its prices jumped by more than 10% in May 2021. (Photo by STR/AFP via Getty Images)

There have been murmurs of an emerging super cycle in commodity markets for quite some time. A super cycle is an extensive period (usually close to a decade) in which commodities are trading at well above their long-term price trend. They are quite rare with only three or four happening in the past century, and each of those was tied to significant economic transformational periods.

Many experts are arguing over whether or not what the markets are doing now could be perceived as the beginnings of a new super cycle, or a shorter-term price rebound rally in response to the impact of Covid-19. A similar bounce in commodity prices happened following the financial crash in 2008, and this was in the midst of the last super cycle.

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The last super cycle

The previous super cycle (which saw a peak in metal prices in 2008) began before the financial crisis in the late 1990s and was driven by a number of factors, including increases in demand and China’s economic rise.

It is believed that clarification on whether or not a super cycle is occurring will take a few years to establish, but what can be established with certainty now is that commodity prices are rising – and as a result investors are biting.

The word on Wall Street is that metals are having a “red-hot bull run”, with Bloomberg reporting that Goldman Sachs and Bank of America are encouraging investors to “load up”.

Like the super cycle that came before, this one is being driven by strong demand from China and a boom in government spending aimed at aiding recovery (this time from Covid-19). The key difference with this potential super cycle and the last is the ‘green’ influence motivating investors, companies and governments.

Are super cycles going green?

The global green agenda is influencing which commodities are rising to the top. Iron ore, a crucial ingredient for steel and palladium, is widely used in the auto industry to limit emissions. It saw its prices jump by more than 10% in Asia Trading on 10 May 2021, rising to more than $226 a tonne, setting a record for the dollar rate.

Other ‘green boosting’ commodities that are seemingly being swept up by the super cycle wave include lithium (widely used in battery manufacturing), neodymium-praseodymium oxide (used in electric motors), palladium (used to filter exhaust gases) and cobalt (a metal used in battery manufacturing).

This could be seen as a promising sign that not only is the commodity price looking to recover with gusto, but it is looking to bring a green agenda with it. The caution would be, however, that the market tends to follow the consumer demand and desire. So long as green investing and mandates remain high on the priority list, these commodities should indeed see their prices fairly safeguarded.

This continued success is dependent on the global economic recovery going smoothly, however. Should another wave of the pandemic or an unforeseen emergency rock the economy, that could undermine metal prices and inflation.

Keep your head in a boom economy

A positive news story for investors and businesses is likely to stand out against the humdrum of Covid news. The fact that the Bloomberg Commodity Index has reached levels not touched since 2015 is reason enough for investors’ hearts to start palpitating. This is before taking into consideration the fact that their portfolios could be peppered with environmentally friendly metals.

Even investment heavyweights such as Warren Buffet remarked on the boom in lumber prices, predicting that this rise will cause inflation in the affected sectors, such as construction and real estate.

At a shareholders meeting on 2 May 2021, Buffet said: “We are seeing very substantial inflation, it is very interesting. We are raising prices. People are raising prices to us and it is being accepted… The costs are just [going] up, up, up.”

Although there is some debate about how quickly inflation is emerging, investors should be cautious in a post-pandemic market. This super cycle is not yet confirmed, and the pandemic not entirely put to bed. It is tempting to ride a wave that is seeing demand for commodities fly upwards, causing demand to outpace supply.

When commodity prices are soaring it is tempting for investors to throw their hat into the ring, but commodities are all about timing and demand. If this market is new to you and you have not yet dealt with the in-out dance with the sector, the sage advice would be to proceed with caution.

Ruth Strachan

Ruth Strachan

Senior reporter

Ruth Strachan is a senior reporter at Investment Monitor, focusing on manufacturing, mining and commodities.