Commodity prices are rising as the world tries to emerge from the pandemic economic deep freeze. Is it just a return to normal or is there more to it?
In a typical cycle, rising prices encourage more selling and production, and less buying and consumption, creating conditions for a subsequent price fall, before the pattern repeats.
In most cases, the cyclical behavior of individual prices shows only limited synchronization across commodity markets (“On the development and impact of commodity prices and cycles”, McGregor et al, UNIDO, 2018).
So the term supercycle is reserved for the largest price fluctuations and longest cycles, typically lasting more than 20 years from trough to peak and back again, involving an unusually broad spectrum of commodities.
Past supercycles peaked in the 1910s, 1950s, 1970s and 2010s, according to a study of prices for 40 agricultural, industrial and energy commodities by economic historian David Jacks.
He argues that supercycles have usually emerged from the consumption rather than the production side of the market (“From boom to bust: a typology of real commodity prices in the long run”, Jacks, 2013).
Previous supercycles were driven by the industrialization and urbanization of the United States and First World War, the reindustrialization of Europe and Japan after World War Two and China’s industrialization and urbanization in the 2000s.
“These are demand-driven episodes closely linked to historical episodes of mass industrialization and urbanization which interact with acute capacity constraints in many product categories – in particular, energy, metals, and minerals – in order to generate above-trend real commodity prices for years, if not decades, on end.”
“However, once such a demand shock emerges, there is generally a countervailing supply response as formerly dormant exploration and extraction activities take off and induced technological change takes hold. Thus, as capacity constraints are eased, real commodity prices revert back to – and below – trend.”
So, will the years ahead qualify as a supercycle?
There are multiple potential triggers for a larger-than-normal upswing in the cycle over the course of the next 5-10 years.
The next major economy likely to industrialize and urbanize is India, which would be large enough to set off a supercycle, though it is less clear whether this will happen imminently.
Construction of new energy infrastructure to support climate targets might also be large enough to trigger a supercycle if it happens fast enough and on a sufficiently large scale.
Finally, large-scale fiscal stimulus following the pandemic might be enough to trigger a supercycle, though it is not yet clear if the stimulus will differ from ordinary cyclical government spending.
At some level, whether or not this counts as a supercycle isn’t that important. It sounds like we’ll be paying more for stuff no matter what we call the trend.