A commodities supercycle: what it means and why it matters.

Historical performance of copper (in $)

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Source: Lyxor International Asset Management, June 2021. Past performance is not a reliable indicator of future results.

The prices of oil and natural gas have risen dramatically too. The OPEC+ group has started to reverse its recent production cuts, but any new supply is likely to be absorbed fairly quickly. Meanwhile, US shale gas has only just turned profitable after years of losses, so cautious producers are keeping capacity unchanged.

The emphasis on clean energy in the various stimulus packages will not have an immediate impact on demand for fossil fuels; traditional energy is required to build green infrastructure. But the long-term implications are less clear. 

What does a supercycle mean for investors? 

Rising commodity prices signal one big thing: inflation. A boom in commodities will, sooner or later, lead to rising prices across the board. That’s bad news for bondholders; most fixed-income products don’t offer protection from inflation.

Then there’s the stock market. Previous supercycles have begun when commodity prices are low and stock prices high – precisely the conditions when the current surge in commodities began. Stocks are still trading at record levels, but that could also suggest that a supercycle is on the cards. Past supercycles have coincided with shares falling from their highs.

But not all stocks are equal. The share prices of materials and energy companies could do very well if a supercycle sets in. And other cyclical stocks could benefit from a commodities boom.

The case against

There are, however, some factors that could prevent a supercycle from taking hold. If China’s growth rate slows significantly, global demand for commodities would moderate too.

Technology is another wild card. Improvements in energy efficiency could reduce demand for fossil fuels. And so too could improved recycling and greater industrial digitalisation.

Finally, if the Biden administration is unable to implement its stimulus packages in full, we may not see a commodities boom on the scale that many expect.

If the events of 2020 taught us anything, it’s that our powers of prediction are limited. So a new commodities supercycle isn’t a certainty. But it is a distinct possibility – one that investors should take seriously when they think about how their portfolios are positioned. 

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