Having enjoyed a 'super-cycle boom' in the 2000s, when huge demand from China and other emerging markets caused a sustained increase in prices, the good times came to a grinding halt for commodities in 2011, when China’s economy started slowing.
The industry had also massively over expanded during the boom (as is typical in these cycles), that the result was a sustained bear market for commodities and miners which didn't bottom until 2016. The likes of Anglo-American saw share prices completely collapse and there was even talk of them going bust.
But a decade later, commodities are back in vogue and whether we are in the early stages of another super-cycle in commodity prices and returns has become a key debate.
Here, we six multi-asset managers give us their views.
“During the lean years, mining companies stopped investing in new projects and instead focused on preserving cash. This resulted in less supply coming into the market, supporting prices. Add in the easy monetary policy and huge fiscal stimulus post the coronavirus and it's not hard to see why prices are rising.
“I think it’s too early to call this a ‘super-cycle’, but there is certainly a structural growth story supporting the asset class. The world is certainly going to need more metals as we transition to cleaner economies. We need more steel for wind turbines - that means demand for iron ore. We need huge amounts of electric wiring for electric cars - that means demand for copper. We need more batteries to store our power as we electrify everything - that means demand for lithium. We need silver for solar panels and electric vehicles, the list goes on.”
“ Over the longer-term, there is clearly a positive story for commodities, driven by a powerful combination of government infrastructure stimulus in the West and renewable infrastructure globally, which is required to support decarbonisation. However, it is too early to say whether the recent rise in commodity prices is due to restocking across major economies as demand comes back online, or something more structural.”
“The fundamentals are certainly there for a new super-cycle. Investment and capital expenditure has been extremely low for a long time due a combination of low prices and, more recently, exacerbated by ESG considerations reducing the availability of capital (this is especially true in thermal coal). For example, BHP and Rio Tinto each spent around $20bn per year in capex at the last peak in 2011. Now we are looking at nearer $7bn per annum each.
“You see this everywhere: copper, iron ore, oil and gas, even shipping has seen huge under-investment with the global order book as a percentage of the fleet at 20+ year lows. Inventories are incredibly low everywhere you look, and this, in combination with a re-opening of economies and huge stimulus, is driving up prices. And, unlike previous cycles we are not seeing a supply-side response: capex forecasts remain low.”
“While there are strong arguments to support the new commodity super-cycle theory (tight supply/demand balances, increasing global infrastructure spend, decarbonisation tailwind, inflationary pressures), commodity prices are notoriously hard to predict. More important than obsessing about terminology and long-term cycles, we think that investors should focus on the appealing characteristics the mining sector in particular offers, be it healthy balance sheets, attractive valuations or increasing desire by management to distribute profits to shareholders. Those companies don’t need a commodities super-cycle to be attractive but, if it happens, this would be the cherry on the cake.”
“We don’t see the world in terms of there being a commodity super-cycle or not, but we do accept that there has been some reflationary sentiment on the back of the global economy emerging from the coronavirus pandemic. The last commodity super-cycle was the result of unprecedented investment in infrastructure across emerging markets, particularly China. It also followed a period of low prices, underinvestment, and decline following the collapse of the Soviet system. I don’t see the situation today as analogous, and, as the old saying goes “to go long commodities is to go short human ingenuity”. Ultimately, I’d be careful reading too much into what at this point amounts to price volatility, without many of the essential components necessary for a prolonged commodity bull run.”
“I'm not convinced. I think we are going to see economic activity moving back to normal over the next 18 months so there will be some inventory drawdown and rebuilding – so maybe a 'mini-super-cycle'! I think it is far too early to extrapolate that into anticipating a multi-year super-cycle.”