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Commodity
super-cycles are defined as decades long price
movements in a wide range of commodities. Super-cycles differ from shorter
term fluctuations in three ways:
- Super-cycles
are demand driven because they follow world GDP
- Super-cycles
span a much longer period of time with upswings of 10-35 years, taking
20-70 years to generate complete cycles
- Super-cycles
are observed over a broad range of commodities, mostly inputs for
industrial production and urban development of an emerging economy
According to DESA Working
Paper No. 110 ‘Super-cycles of commodity prices since the mid-nineteenth
century’ published February 2012 by Bilge Erten
and José Antonio Ocampo there have been 3.5
non-fuel commodity super-cycles from 1894 to 2009:
(1) from
1894 to 1932, peaking in 1917. The first long cycle begins in late 1890s,
peaks around World War I, and ends around 1930s, and shows strong upward and
downward phases.
(2) from
1932 to 1971, peaking in 1951. The second takes off in 1930s, peaks during
the post-war reconstruction of Europe, and fades away in mid 1960s. It shows
a strong upward phase but a weak downward one.
(3) from
1971 to 1999. The early 1970s marks the beginning of the third cycle, which
peaks around early 1970s and turns downward during mid
1970s and ends in late 1990s. This cycle shows a weak upward phase and
a strong downward one.
(4) 2001 still ongoing.
The post-2000 episode is the beginning of the latest cycle, which has shown a
strong upward phase which does not seem to have been exhausted so far.
 
 The most recent boom (from 2001) in global
economic growth or GDP, is unprecedented.
“Global growth
performance has been attributed as the single most important driver of commodity
markets, being most pronounced for metals.
The basic premise is
that commodity prices and world GDP have a long-term relationship over time
because the robust growth episodes in the world economy are accompanied by a
rapid pace of industrialization and urbanization, which in turn require an
increasing supply of primary commodities as inputs of production. However,
there is often a lag between the investment in further commodity production
and the actual results, which leads to price hikes in periods of strong world
economic growth. As growth slows down and investment generates with a lag an
increase in commodity supplies, the pressure on commodity prices eases. This
hypothesis implies that the super-cycles in world output fluctuations
generate corresponding super-cycles in real commodity prices.” DESA Working
Paper No. 110
The real prices of energy
and metals more than doubled from the lows of 1999 and late 2001/2002 to the
high in 2008.
After suffering a severe
correction in late 2008 (because of a global economic slowdown) and bottoming
in early 2009 commodity prices started to recover – from the low in early
2009 commodity prices have been putting in higher highs and higher lows.
By comparing the charts
above it’s obvious metals and agricultural have a
long running integrated relationship with global GDP.
The phases and durations
of previous super-cycles lead us to expect an upswing phase of between ten
and thirty years. Being that we’re twelve years into this super-cycle is
there more to come, or has supply caught up to a cooling global economy?
First let’s recap,
commodity prices are dependent on:
- Demand
side factors - the rapid pace of industrial development and urbanization
in China, India, and other emerging economies
- Supply
side factors - increasing costs due to resource depletion, resource
nationalization, geo-political risk or lack of investment in capacity
enhancement
To help us answer whether
or not commodity price strength will continue we first turn to global growth
predictions:
Conference
Board
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the most successful man in life is the man who has the best information
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