Commodity prices on upswing but don't call it a supercycle

As investors pile into commodities and some banks raise the price targets on everything from base metals to oil and agricultural products, economists are cautioning that the current bull market should not be confused with a “supercycle.”

“With things as volatile and uncertain as they are right now, saying a blanket `commodities supercycle' is a little premature,” said Rory Johnston, managing director and market economist at Price Street, a quantitative research firm developing analytical tools for the financial industry, in Toronto.

Citigroup's managing director and global head of commodities research Ed Morse said there have been two spectacular surges in commodity prices — in the 1970s and in the 2000s — which led to massive, multi-year increase in commodity prices and especially in the price of oil.

“What was true about those supercycles and is not at all true now is that virtually all commodities reached a cyclical trough at exactly the same time,” Morse said in an interview, adding previous commodity surges were characterized by a lack of investment and a lack of inventory.

This time, Morse said, there may be a lack of investment currently but “the material is abundant” for multiple commodities including the inputs used for making steel and for oil, thanks to the rise of horizontal drilling for oil in North America.

Gleeful investors have watched as a broad basket of commodities have risen sharply and the Brent oil price benchmark hit a one-year high on Monday, when it traded up two per cent to finish the day at US$60.56 per barrel — the first time crude surpassed US$60 per barrel since January 2020.

In addition to crude, multiple base metals have touched multiyear highs in recent weeks including copper, which hit US$3.70 per pound in January, and iron ore, which also traded at a 10-year high of US$170 per tonne in mid January — highs not seen since 2011.

Copper closed at US$3.60 per pound Monday and iron ore traded at US$155.50 per tonne.

The broad S&P GCSI Commodity Index, comprising 28 investable commodities, has risen 10 per cent this year alone.

A slew of banks have begun using the term “commodity supercycle” to describe the current market dynamics, which are largely driven by rebounding demand in China, where an economic rebound following its COVID-19 lockdowns and steelmaking and manufacturing has driven price appreciation.

But economists warn the term is too exuberant a term for what is expected to be a two-year bull market for commodities that could still be derailed by more shutdowns from the outbreak of COVID-19 variants.

Price Street's Johnston said much of the commodity hype has followed a bullish thesis that New York investment bank Goldman Sachs published late last year.

Goldman Sachs's commodities research team called for a bull market in commodities in October 2020 and has been publishing notes to support its “policy-driven structural rise in commodity demand thesis” since that time, which is underpinned in part by a “globally synchronized green wave of stimulus” spending that will drive commodity prices higher.