The recent strong upswing in commodity prices, particularly oil and base metals, has prompted investors to ask whether commodities are entering a new supercycle. Brent prices have risen above their pre-pandemic levels while copper looks set to hit USD10k/t sooner rather than later.
The cyclical commodity upswing has room to run, but it is too early to call for a supercycle
Source: Bloomberg, Bank of Singapore
Commodity price supercycles are an extended multi-decade period of prices rising above and falling below their long-run trend. The last supercycle took place in the early 2000s, driven by China’s export and infrastructure boom and the country’s accession to the World Trade Organization (WTO) in 2001. Older supercycles coincided with periods of rapid industrialisation and reconstruction after major conflicts and wars.
Focus on climate change is back as major economies such as the EU, China and the US strive for climate leadership in 2021.
Much of the debate now on the commodity supercycle is focused on the green infrastructure push to support the broader use of renewable energy and electric vehicles. Low-carbon infrastructure is metal intensive.
This trend could create a structural source of demand for industrial metals. However, only when concrete policies are announced on the energy transition can we be more confident of significant demand growth.
The commodity outlook over the next few quarters looks robust. The risk is skewed to the upside of our 6- and 12-month Brent crude forecasts of USD72/bbl.
First, a move toward mass vaccination, as vaccine supply and eligibility broaden, should set the stage for more widespread activity pick-up in 2H21. This is positive for commodity demand.
Second, industrial commodity could benefit from a more commodity-intensive US growth. With the USD1.9trn of fiscal relief now approved, the Biden administration will turn its attention to a multi-year infrastructure package later this year.
Third, investors fearful of higher inflation as the US goes big on fiscal stimulus could continue to shift assets into oil and base metals as a hedge. Gold, as a no-yield commodity, has lost out as an inflation hedge amid upward pressures on US long-term interest rates.
The cyclical upturn in commodity demand has room to run, but it is too early to call for a supercycle.
Significant structural changes that will heavily impact long-term commodity demand over the next decades appear lacking. The push for renewables has the potential to turn the commodity boom into a supercycle for base metals.
But amid gradual removal of policy support in China, made possible by an impressive recovery after putting the pandemic under control domestically, China’s industrial metal demand could moderate.
We expect, in general, higher prices in commodities to be met with significant additions to supply. OPEC+ constraints have lifted oil prices, but rising oil prices would be self-limiting.
First, with the recent rise in oil prices, OPEC could be prepared to increase some production quotas, which could limit the scope for higher oil prices. Second, the 12-month forward WTI is now trading USD15-20/bbl above average shale break-evens.
This presents a real test of capital discipline in the nimble US shale sector and could pave way for a return of shale to higher production earlier.
Third, a possible partial return of Iranian oil to global oil markets in 2H21may also temper price increases.
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