A closer look at raw material supercycles

By on May 24, 2021 0

By Blu Putnam and Erik Norland

IN ONE LOOK
The raw material supercycles of the 1970s and 1990s had major economic and monetary drivers, but it is not known if such a driver exists today.
The Bloomberg and S & P-Goldman Sachs commodity indices rose sharply, although it could be years before a supercycle is completed, according to economists at CME Group

For a product to grow into a supercycle, it must meet three criteria, says Erik Norland. The trend must be broad, which means that it must include the majority of the main products; it should have a duration of five years or more; and finally, the price increase should be “oversized” as in a tripling or more.

By that benchmark, two commodity supercycles have occurred since the end of WWII, say Norland and Blu Putnam in the latest episode of The Economists, which you can watch above.

1. From the mid-1960s to the 1970s
2. Mid 90s – 2008

The supercycle of the 1960s and 1970s was all about the depreciation of the US dollar after the standard dollar fixed exchange rate system was broken. “When the dollar fell year after year in the 1970s, commodities continued to rise. It was a broad-based commodity supercycle, ”says Putnam.

The supercycle of the 90s and 2000s was due to the enormous growth and modernization of China.

“You simply cannot modernize a country of over a billion people without consuming huge amounts of industrial metals such as copper and energy products such as petroleum,” says Norland.

This is the story. But where are we now? The increases in commodity prices in 2021 could show the first steps in a new commodity supercycle. The Bloomberg and S & P-Goldman Sachs commodity indices both saw strong gains in 2021, rising 17% and 26% respectively at the start of May.

If we see a supercycle, it won’t be for the same reasons the last two do, say Norland and Putnam.

“I would say it won’t be anything like the last two supercycles,” says Norland. “The demographic headwinds are going to be severe for China as we approach the 2020s. And with an aging population, a decline in the labor force is very likely. “

Mr. Putnam says: “Sure, the US dollar can experience periods of weakness, but the sustained declines of the 1970s are not as likely given the consistency and timing of monetary policy directions among mature industrialized countries. “

There are a few possibilities for what could drive the next supercycle, they say in the video above. But basically there is a constant in every supercycle.

“The bottom line is that commodity supercycles require an oversized driver. We also note that Supercycles, like asset price bubbles, are better recognized in the rearview mirror, ”says Putnam.

The Economists is a video series covering the industries and events shaping the global economy with a particular focus on post-pandemic economic realities. The episodes are published monthly.

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