Avidian Report – Is There a Commodities Supercycle Around the Corner?

INSIDE THIS EDITION:
Is There a Commodities Supercycle Around the Corner?

Despite some weakness in equity markets this week and a spike in the 10-year treasury that spooked investors, we have been closely watching upward price movements across commodity markets for weeks.

Oil prices, for example, have risen approximately 30% this year on a pickup in demand and the expectation that demand will continue to increase through the end of the year. At the same time, some metals, including copper, are seeing steep price increases due to expected supply shortages ahead. This week we saw copper prices rise above $9,000 per ton for the first time in nearly a decade, which puts it within striking distance of its all-time high set in 2011.

Most noteworthy is that these price increases in commodities may also indicate investors are starting to get portfolios positioned for rising inflation risks. Looking at fund flows, we see that money has been steadily flowing into commodities since the second half of 2020. This has led to the largest net-long position in commodities that we have seen since before 2011.

In fact, net-long positioning in commodities. combined with forecasts that call for rising inflation and a depreciation of the US dollar, have some large institutions saying that we could be witnessing the beginning of a new commodity supercycle. This would be the fifth new commodity supercycle, a drawn-out period of rising commodity prices that exceed long-term trends that we have seen over the last 100 years. The chart that follows shows the magnitude and duration of the last four commodity supercycles, and we note that they tend to extend for quite a long time.

And while we are not necessarily prepared to call for a commodity supercycle just yet, we acknowledge that a post-pandemic economic recovery mixed with loose monetary policy raises the chance of a robust commodity cycle.

We consider chances to increase, especially factoring in the move toward renewable energy and electrification across economic sectors will require considerable investment in infrastructure, further boosting demand for many commodities.

To provide a sense of how substantial the demand increase might be, we can look to a study conducted by Deloitte titled “Commodities of the future: Predicting tomorrow’s disruptors.” In it, they predicted that global demand for lithium would double or triple by 2030, that electric vehicles will require four times the copper required by combustion powered engines, and demand for battery-grade nickel will increase 50% by 2030.

As you might imagine, these might be strong secular trends that also have large implications for the commodity cycle. More specifically, they might drive higher fuel prices, higher food prices, and higher input prices for goods and services, including construction. A strong commodity cycle might additionally have non-financial impacts on global trade, currencies, and geopolitics. With such a complex commodity environment potentially awaiting us as investors, we continue to believe that extra attention should be given to both global macroeconomic developments and broad commodity markets. These sectors might ultimately offer opportunities to either hedge against inflation or take advantage of a strong commodity cycle.

Weekly Global Asset Class Performance Table

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