Did Politics Break the Commodity Super Cycle?
Or did it just kick off an historic multi-decade trend?
Commodity prices trade in cycles. They go through extended periods of time where prices hover well above or below their historic average.
The reason behind these cycles is the several-year lag between a supply vs. demand response. If demand for a commodity soars, supply would take years to catch up – prices remain elevated in the meantime.
That’s the theory, at least.
The chart below depicts the theoretical Commodity Cycle in all its glory.
This is where the commodity adage “Nothing like high prices to cure high prices” comes from.
But does it still ring true?
Today’s state of the world leads us to believe that this is no longer the case.
It seems that every single commodity is at the “Period of High Prices” stage depicted above.
But forces such as energy (over) regulation, subsidies, ESG-centric institutional investors and public etc. are enabling increased resources demand while doing no favors to facilitate “Increased Investment in Production.”
Its overpowered the natural market cycle of supply & demand.
Or has it?
Commodity Prices Synced Up – Dislocations Ahead
The future of each commodity is set for vastly different paths in the near-term. Overtime they’ll consolidate into its historic mean, syncing up to create a macro trend as they always do. We can (kind of) see below that commodities across the board tend to rise and fall in prices together.
Why? We’ll get to that in a moment.
One interesting thing to note in this chart is the peaks of various commodities.
Out of the 11 we track here, 6 hit their all-time highs in 2022 including: Aluminum, Coal, Copper, Corn, Natural Gas, and Wheat. We could’ve thrown lithium in there too – but pricing data is history is sparse since global trade was <$1 billion annually until 2008.
Most other commodities saw their previous highs reached in the run-up ahead of the financial crisis of ’08, which includes Crude, Nickel and Uranium.
Each commodity has its own volatility profile, moving by varying orders of magnitude given specific events, risk factors, fundamentals etc. Dislocations among each commodity occur from time-to-time, but in the long term end up syncing with the broader economic cycle.
Today the majority of commodities seem to be synced up at historically elevated prices following the post-COVID demand resurgence, with the exception of Uranium, it seems.
Can we expect dislocations across various commodity prices in the future?
Is the Supercycle a simple fluke emerging from the sudden post-COVID supply & demand shock?
Or will the culmination of subsidies, tax credits, and regulation keep the Supercycle train rolling?
Let’s dive in!