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Follow the Curve: Commodities Supercycle 2021

June 7, 2021
by Leon Marshall,

Article Recap

The commodities supercycle is an important part of the global economy. In pandemic times, its importance grows even more.

The commodities supercycle is often associated with a change in economics and the commodity market – and for a reason. It is within that supercycle that the prices of commodities can skyrocket. This event can decide the course of the commodities economy in the next few decades. However, how relevant is the commodities supercycle in 2021?

What is a Commodities Supercycle?

To begin with, a commodities boom, often known as a commodities supercycle, describes the rise of physical commodity prices above their long-term price trend. It can last up to four decades. In general, these cycles can be separated into four periods spanning from the middle nineteenth century to present day. The United Nations’ Economic & Social Affairs DESA Working Paper No 110 explains the sypercycles in detail. The paper points that oil prices have experienced “a long-term upward trend, interrupted temporarily during the twentieth century”.

Furthermore, the aforementioned paper separates them into four. It highlights that during these periods the focus is primarily non-fuel commodities that have shown amplitude numbers ranging “between 20 to 40 percent higher or lower than the long-run trend”. There seems to be a tendency towards deterioration of agricultural prices with each supercycle. The exception were metals during the supercycle experienced during the late 2000’s into the early 2010’s.

Why Does it Happen Now?

Some comments suggest we could be in a new commodity supercycle and for now iron-ore, copper and other industrial commodities remain in hot demand, possibly supporting that idea. – Joe Jeffriess, Eightcap Market Analyst (May 10, 2021)

Recent commodity price hikes during the 21st century are attributed, in general, to the strong global growth performance of BRIC (Brazil, Russia, India, and China) economies and due to China’s focus on metals and energy in particular the paper outlines. A reason for this growth is the acceleration of global output.

BRICS flags waving against the clear blue sky

For the foreseeable future, it would require a “delinking from the long period of slow growth expected in the developed countries”. This leaves us with two implications:

  1. the importance of diversifying products and services, and
  2. the awareness of being prepared for both expansion and contraction phases.

In other words, during commodities supercycles up until now, we have seen a rise in demand. A demand, which has not been met with the appropriate supply. Hence, this has led to a rise in price.

To combat that, an increase in the diversity of the offered goods could prevent deteriorating trends. It can also make the market more open to a rich variety of traders and investors. Research by the Bank of Canada further solidifies that statement and even names India as a moving factor in the next industrialization phase that could prove key to the changing trends in the commodities world.

What Drives the Prices Up?

Kalgoorlie, Western Australia: Large truck transports gold ore from the Super Pit, Open cast mine.

As analysis of supercycles thus far suggests, it is precisely human industrialization that drives commodity prices into cycles. Due to the simultaneous growth of more parts of the world, demand isn’t limited to a set of nations. It is instead open to every single country. However, resources are limited and so are commodities. It is logical to reason that the scarcer and more valuable they become, the more powerful nations with access to them grow.

Even today, we see that the demand for some commodities can explode along with the price, as demonstrated by copper going from $2,000 per ton in 2000 to over $9,000 and even $10,000 in 2011. Of course, there have been downwards trends. One such example is the slump of oil prices starting 2014.

It is not easy to identify rising demand. But a global event large enough to shake the whole world, may be the link to a new type of commodities supercycle. And one has already begun.

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The Effect of the Pandemic

According to Goldman Sachs, a year on from the beginning of the COVID 19 pandemic the US is entering a period of recovery on a national level, and one where the vaccine could create a V-shaped economic rebound. Analysts believe this could rival the one from the early 2000s.

While government stimulus checks are one factor that could lead to this, depending on President Biden’s infrastructure plans, a wide range of commodities, specifically in the construction field, could see a boom in demand.

Workers Wanted, Apply Within on a sign near a road.

 

We can expect a growing demand to correlate to labor market growth as well. That, in itself, could be the trigger for further economic expansion. It’s a fact that a large portion of commodities come from developing nations. Тhis means that the entire world could be a target for growth set to happen in the coming years of extracting, processing, transporting, and using commodities of all nature.

This leads us to the next point – how do we aim to trade with the trend and invest in commodities? We already touched upon the exploding price of copper. Just as important is the lithium market. The commodity is used to produce batteries and the electric vehicles industry and UN representatives say we should look toward it as well. Lithium companies also are on top of our list of stocks to watch in 2021. If we take those along with the traditional safe-haven investment of gold, we see that it is already a vastly diversified market and there are a number of commodities to pick from.

How to Trade 2021 Commodities Supercycle

When speaking of commodities trading, it’s essential to think about which broker can provide you with the necessary trading conditions. An environment, with all available financial tools at your disposal, is a must. Eightcap is a trusted broker that provides traders with an award-winning platform that you can trade on from mobile or desktop devices, including browsers. You can focus on trading leading CFD commodities such as Brent and WTI oil, precious metals like gold and silver, and more. When trading CFD products with Eightcap, you are able to speculate on the movement in price of these commodities. Please note that you will not own the underlying asset.

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Risk Warning: Margin trading carries significant risks, including the risk of losing the entirety of your initial investment. You also do not own, or have any rights to the underlying assets.

All times are AEDT.