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Is the Commodity Supercycle Over?

March 21, 2023

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Is the Commodity Supercycle Over?

As we move into the second quarter of 2023, commodity prices remain a hot topic among investors and analysts. The pandemic has caused significant volatility in the markets, but what does the future hold for commodities? Are we in the midst of a supercycle, or is it coming to an end? A recent poll run by Commodities People conducted on the issue revealed that a significant percentage of respondents (47%) remain uncertain, citing conflicting factors as the primary reason for their ambiguity.

On the other hand, an optimistic 33% of respondents believe that the commodity supercycle is still going strong, and they predict that prices will continue to rise in the coming years. Meanwhile, a minority of 10% of respondents believe that the supercycle is already over and that prices will stabilise, while another 10% predict a decline in commodity prices.

Deciding whether the commodity supercycle has concluded is a multifaceted matter. Commodity supercycles are uncommon and generally stem from fundamental changes on a global scale. The present escalation in commodity prices may be the beginning of a new supercycle or just momentary cyclical rises influenced by different factors, such as the ongoing conflict from Russia’s war on Ukraine.

The recent geopolitical tensions and trade finance challenges of 2023 have had a significant impact on the commodity markets, making it challenging to predict with certainty what the future holds. Such instability may lead to future market disruptions, which could cause prices to remain high until the end of 2024.

China, the world's largest consumer of commodities, is experiencing a shift in its economy, with a focus on domestic consumption rather than exports. China's shift in focus from exports to domestic consumption is a major influence on the commodity markets. The country's economic growth was previously driven by exporting goods, fueling the demand for raw materials and commodities. However, China's economy has slowed down, prompting a change in focus to developing the domestic market. This shift is expected to continue, with China becoming the largest consumer of commodities worldwide.

This shift will lead to changes in demand for certain commodities, such as increased demand for lithium, cobalt, and copper due to China's transition towards renewable energy sources and electric vehicles. Additionally, China's reduced reliance on imports as it becomes more self-sufficient may lead to decreased global demand for certain commodities, which will impact prices.

The ongoing war on Ukraine has already caused significant disruptions in agricultural markets, resulting in future market disruptions. The World Bank has warned that the war in Ukraine is changing the pattern of trade, production, and consumption of basic products, leading to sustained high prices until the end of 2024. According to The World Bank, the war in Ukraine jeopardised more than one-third of world wheat trade, 17% of world maize trade, and almost 75% of world sunflower trade, leading to export-limiting measures such as quotas, licences, and outright bans.

Respondent Lamia Sayari Riabi CDCS, Head Trade Finance Department at Attijari Bank said, “Commodities supercycles are a relatively rare phenomenon. Usually driven by structural change across the world, it can last for decades ; where commodities trade above their long-term price trend over a long period. We could say that what we are witnessing, such a broad surge in commodity prices, is a supercycle kick off, or just a temporary cyclical upswing driven by various phenomena such as the Ukraine-Russia war. As Russia’s invasion of Ukraine continues, uncertainty remains in agricultural markets. Such instability may lead to future market disruptions, which can be seen by The World Bank report, which emphasises that the war in Ukraine is changing the pattern of trade, production and consumption of basic products, which should keep prices at high levels until the end of 2024. As a consequence, export-limiting measures have been implemented, causing price distortion. It has been estimated that those restrictions covered more than 11% of global food trade in 2022, with export bans alone responsible for 3.8%.”

The changing face of commodity markets is also worth considering. New players and rules are emerging, driven by the influx of new money and markets. A shift towards sustainable investments and ESG concerns has caused investors to look for ways to incorporate ESG into their commodity portfolios. With the rise of digital technology and the increasing use of blockchain in the commodity trade, we are seeing a new era of innovation in the sector. These developments are causing significant disruptions in traditional commodity trading practices and paving the way for new opportunities and growth.

However, the acceleration of a new mega-trend, the transition to a low-carbon economy, may be a catalyst for a new commodity supercycle. Climate change and climate risk pose significant threats to the global economy, and as such, the Paris Agreement and the UN's Sustainable Development Goals (SDGs) must be met.

Lamia Riabi said, “The transition to a low-carbon economy will last for decades, and it will impact commodities in different ways. Different raw materials will be affected differently depending on their exposure to climate risk and transition risk. The switch to low-carbon energy is already providing a high demand for raw materials needed to build renewable energy infrastructure and produce the batteries used in electric vehicles.”

In conclusion, while the poll results may be somewhat mixed, it is clear that the commodity supercycle is far from over. With geopolitical uncertainties, new money, markets, rules, and players, and the looming transition to a low-carbon economy, the commodities market is poised for significant changes in the coming years. For those interested in staying ahead of the curve, attending Commodity Trading Week in London on the 25th-26th April 2023 at the QEII Centre is a must.

The event provides an excellent opportunity for professionals to network, share insights, and stay up-to-date with the latest industry developments. Registering for this event is a must for any commodity professional looking to stay ahead of the curve in these uncertain times.

Written by: Commodities People

Commodity Investment