Regarding Our Current Commodity Super Cycle

Richard (Rick) Mills
Ahead of the Herd

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As a general rule, the most successful man in life is the man who has the best information

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:

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