A simple chart from our friend, Tom Pickering at Auspice, describes the foundation for this current super-cycle. Commodity super-cycles do not follow the credit or business cycle although both these cycles can support and reinforce the commodity super-cycle.
A commodity super-cycle has three key drivers. An unexpected and sustained increase in demand. A shortfall in past investments that reduces new supply. Short-term catalysts that cause price spikes and leads to logistical disruptions.
The demand issue is associated with the pandemic; however, this shock is not the same as the increase in China commodity demand which was the cause of the last super-cycle. Underinvestment is curtailing supply. A lack of capital will be a major catalyst for the super-cycle. The underinvestment problem is threefold. One, a lack of investment in some commodity sectors have a long-term effect that only shows itself when there is a market shock. Two, there is greater need for mining investment to account for the renewable and EV revolution. This is a relative investment issue but will drive key markets. Three, there is the underinvestment caused by the switch to ESG investing. Commodity extraction is a dirty business and has been avoided.
The catalysts for the current price shocks are the pandemic and Ukraine War which has stressed logistics and has created a rethinking of where and how commodities are sourced and transported. The government policies through regulation and sanction. creates a new costly environment. These catalysts create a reordering of investments which was unexpected. Commodity logistics cannot be easily changed in the short run.
The easy money may have already been made in commodities, but the overall opportunities in this sector will continue. Super-cycles can last for years, and the current backwardation is favorable for long investors.
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