Commodities Supercycle Looks Like A Stretch
Investors bet against history and predict a surge over extended period.
4 min
Commodity markets are roaring, stirring a debate about whether prices are headed for an extended upswing. The history of booms and busts in raw materials suggests the conditions aren’t right.
Prices for Brent crude, the international benchmark in energy markets, have jumped 82% since the end of October. Copper is more expensive than it has been since 2011. Food hasn’t cost as much since 2014, according to a United Nations index.
Some investors and analysts say commodities are in the early stages of a supercycle. That is a period when prices of livestock, grains, metals, oil and gas all climb for years, even decades.
A prolonged upturn would present investors with an opportunity to make money from long-term bets on exchange-traded products that track commodity prices. Such vehicles bloomed in popularity when commodity markets soared in the 2000s and early 2010s, only to fall out of favour when prices tanked in 2014.
But the chances of commodity prices rising in tandem over a long period are slim. Such cycles are rare. They have occurred when a major economy such as the U.S. or China undergoes rapid industrialization or urbanization, creating demand for raw materials that existing supplies struggle to meet.
Economists say they don’t see a similar catalyst right now. A swift expansion in the global economy this year and next is likely to power demand. Beyond that, many analysts see oil consumption, in particular, slowing down.
“It pays investors, it pays policy makers to be a little bit sceptical of characterizing the developments of the past six to 12 months as the seeds of a new supercycle,” said David Jacks, a professor at Singapore’s Yale-NUS College who has studied the history of commodity markets.
Commodity prices are an important barometer for financial markets. Rising gasoline and energy costs contributed to a modest increase in the rate of U.S. inflation earlier this year. Expectations of a leap in consumer prices sent bond yields surging in recent weeks and cooled corners of the stock market.
When resources’ prices swing higher for an extended period, one of three things happens. The first is an economic shock, such as the recession in the 1970s, caused in part by the Arab oil embargo. The second is a rush of supply as miners, energy producers and farmers seek to cash in. Over time, people switch to cheaper alternatives.
Adjusting for inflation, U.S. crude prices in 2020 were well below their peaks from 2008 and 1980, though they were more than double the 1945 level, according to data compiled by Mr Jacks. Inflation-adjusted grain prices have dropped since World War II due to advances in crop science, Mr Jacks said.
The last supercycle occurred from the late 1990s, when a rapid expansion of cities and industry in China unleashed waves of demand for natural resources, according to Daniel Jerrett, chief investment officer at Stategy Capital LP. Supply was slow to respond and commodity prices, adjusting for inflation, shot up.
“Is there anything out there like that now? I don’t see it,” Mr Jerrett said.
The China-led supercycle kicked off with crude-oil and copper prices at their lowest level in more than a decade. That isn’t the case now: Copper prices, for instance, are close to record highs.
The current outlook for commodity prices is especially complicated because of a number of competing forces.
Some commodities have been swept up in the “everything rally’’ phenomenon. The roaring market for assets from stocks to bitcoin suggests investors are flush with cash and speculating that prices will keep rising. An influx of money into precious metals has started to reverse, showing how fast money can flow back out.
A big unknown is how the drive to cut carbon emissions shifts supply and demand for different commodities. Switching to cleaner sources of energy will likely turbocharge purchases of materials such as copper and nickel, bulls contend. Before those efforts choke off demand for gasoline and diesel, a dearth of investment in the oil industry could buoy crude prices, too.
For now, however, the oil market remains on life support from members of the Organization of the Petroleum Exporting Countries and Russia, which are holding millions of barrels of crude in the ground each day to bolster prices.
The production cuts and a recovery in demand in China and India have helped oil prices rebound since crashing last spring. Brent crude futures have gained a third this year to about $69 a barrel. Some investors are betting they could surpass their all-time high of $148 a barrel in 2008.
U.S. production won’t keep up with the recovery in consumption due to restrictions on drilling on federal lands and belt-tightening by producers, said Christyan Malek, head of oil and gas research at JPMorgan Chase & Co. Cutting emissions at wells will boost production costs, and big oil companies are investing in renewable-energy sources instead of crude, he added.
The world’s biggest independent oil trader doesn’t see an imminent supply crunch. “We have plenty of reserves in the ground, we have plenty of refining capacity and we have plenty of ships to move oil,” said Giovanni Serio, head of research at Vitol.
Copper prices have leapt 67% over the past year to about $9,100 a metric ton on the London Metal Exchange. Goldman Sachs Group sees them hitting an all-time high of $10,500 in the next 12 months, in part because the energy transition will require metals that store and transmit power.
There are bumps in the road. Metal prices are the beneficiary of booming demand for goods and the economy’s emergence from lockdown. Both fillips are likely to fade. Also, it will be years before green infrastructure and technologies devour metals such as lithium at a pace that propels prices upward, analysts say.
Traders say there is plenty of copper available right now. Teck Resources Ltd., Ivanhoe Mines Ltd. and others, meanwhile, are due to start producing at new mines in the next few years.
The current run-up in metal prices in part reflects the same forces that have driven the past year’s recovery in stocks and corporate bonds.
“Fiscal and monetary stimulus has underpinned the rally since last March,” said Tom Mulqueen, head of research at Amalgamated Metal Trading Ltd. “There’s just more money in financial markets.”
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
4 min
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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