After underperforming over recent years, commodities have seen a jump in prices in the past six months amidst renewed investor attention. Some analysts have taken this price action as a starting gun for a new commodity “supercycle”, an extended multi-decade period of prices rising and falling. There is some speculation that the commodity market is now on the verge of a period which will see a long-term boom in demand and rising prices. The previous supercycle took place in the early 2000s after China’s export and infrastructure boom and World Trade Organization membership. Older cycles coincided with industrialization and rebuilding after major conflicts and wars. While we are not expecting something as disastrous as major conflict breaking out, the current environment has several factors pointing towards early stages of an up-cycle.

The global economy is improving as it moves out of the coronavirus pandemic. Infection rates are coming down and various vaccines are being rolled out. Vaccine-driven optimism and recovery expectations are fueling the idea that activity will accelerate after being depressed for more than a year. This is certainly a bullish factor for commodity demand.

Ultra-loose monetary policy and huge fiscal stimulus to support economies could be enough to trigger large spending flows and investment into commodity production. At the same time, these policies have caused inflation expectations to rise. With commodities typically seen as an inflation hedge and central banks pledging to keep rates low, investing in commodities is becoming more appealing, especially industrial metals that rise with the cycle. Fiscal stimulus has also kept the U.S. dollar low, another supportive factor. The U.S. dollar and commodities tend to have an inverse relationship, where a weaker U.S. dollar would lead to cheaper commodities globally due to them becoming cheaper in foreign currency terms, increasing demand and commodity performance.    

Governments globally have increasingly prioritized climate change policies, with China, the world’s largest carbon emitter, committing to carbon neutrality by 2060. To meet their goals, global governments are increasing green infrastructure spending to support the broader use of renewable energy and electric vehicles. This has boosted the demand outlook for industrial metals such as copper, aluminum, lithium, etc., as electric vehicles and renewable power plants are very metal-intensive.

Despite the positive signs for an up-cycle, we think it is too early to call this as a start of the supercycle. 

EXHIBIT 1: COMMODITY RALLY HAS ALMOST KEPT PACE WITH EQUITIES SINCE 2020
INDEXED TO JANUARY 1, 2020 = 100

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management.
Data reflect most recently available as of March 8, 2021.

China’s structural developments has driven previous cycles, and its demand can cause huge moves in commodity prices. However, most of China’s recent commodity demand has been driven by fiscal stimulus directed at infrastructure and property development. We believe China will roll back its fiscal stimulus this year and this could lead to a slower demand for industrial metals. As China normalizes its economic activities back to pre-COVID mode, commodity imports will ease back to previous trends. China’s focus on creating an economy driven more locally by consumption and less reliant on overseas factors as part of their “dual circulation” strategy is another point that suggests its commodity demand will not accelerate significantly. India could be the next source of demand surge if the government is able to engineer a wave of industrialization and infrastructure boom. That does not seem likely for the time being as the financial intermediaries will need to time to clean up before they can start to have the ability to fund large scale economic reforms.

While the renewable trend could be a possible driver of a supercycle, we are still in the early stages of this trend playing out. Looking specifically at copper, the previous China-led supercycle started when China’s demand share reached ~20% of the total market in 2004, while the current estimated “green demand” share is only at 4% and is not forecasted to reach 20% until the 2030s. So while we think the renewable trend is a favorable one for commodities, we do not see it driving a structural supercycle just yet.

Investment implications

We think it is still too early to call for a commodity supercycle. There are several positive factors affecting commodities, but most of these appear to be cyclical factors, rather than significant structural changes that will heavily impact long-term demand over the next decades. The push for renewables appears to be one of the most likely structural factors in our view, but we would have to see more commitment from policymakers. Still, our expectation is for commodities to continue to trend upward in the medium term due to the current recovery, which would support certain cyclical sectors, including energy and materials. 

0903c02a82b0b16e