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In One Chart: Chatter about a ‘commodity supercycle’ is dying down — here’s why the debate isn’t over

The number of news stories about a potential “commodity supercycle” — generally defined as a decadeslong stretch in which commodities trade above their long-term trend — are on the wane as prices for some previously highflying items have come back toward earth, but it doesn’t look like the debate is over, according to Société Générale’s top commodity analyst.

But, in the end, a debate over what is meant exactly by the term supercycle may be in order, said Michael Haigh, the French bank’s global head of commodities, in a Wednesday note, arguing that some commodities, particularly metals, are more likely than others to exhibit “supercycle”-style price action in the years ahead.

As for the data, Bloomberg’s News Trend function, which evaluates
30,000 financial news sources, the daily number of articles discussing the prospects of a commodity supercycle have almost halved since a recent peak in May of 3,685 articles, which followed a previous peak of 3,584 articles in February, Haigh noted.

By the end of August, the number of articles had declined to 1,882 (see chart below).

Société Générale

“The trend is clearly down but not out,” Haigh wrote.

Talk of a supercycle was fanned as the prices of a number of commodities began to soar in late 2020 and the first half of this year. Supply bottlenecks resulting from the COVID-19 pandemic were seen amplifying shortages and underinvestment in production of a number of key commodities, including copper, while the reopening of the global economy sparked a surge in demand.

Lumber prices were in the spotlight, as a surge in prices took futures
LB00,
-4.87%

up more than 600% from their April 2020 bottom to a May 2021 peak above $1,600 per 1,000-board-feet. Lumber has since come off the boil, trading Wednesday near $518 per 1,000-board feet and down more than 40% for the year to date.

Commodities remain broadly higher for the year, however. The The S&P GSCI Index 
SPGSCI,
+0.26%
,
which tracks 24 exchange-traded commodities, hit a more-than-six-year high in July and remains up nearly 30% for the year to date.

The S&P 500
SPX,
-0.20%

has provided a cumulative return of 21.5% for the year to date, according to FactSet.

So why the slower newsflow? Haigh wrote that the reasons are hard to diagnose precisely, but price stabilization “clearly explains part of the decline.”

Some other metrics also offer insight, he said, noting that flows into markets most directly involved in the commodity supercycle, particularly metals, appear to have stalled or even reversed. For copper, which has been largely rangebound since mid-June, based on LME prices, long inflows from money managers appear to have stalled or even started to reverse, Haigh said, while assets under management held in copper exchange-traded funds have started to decline.

And then there is China.

The Caixin and official manufacturing purchasing managers indexes for August fell from 50.3 to 49.2 and from 50.4 to 50.1, respectively. The 50 level is viewed as the dividing line between expansion and contraction in activity.

The Caixin PMI reading was an 18-month low. The deteriorating readings likely reflect, in part, supply constraints, but “there are also clear signs of weaker demand,” Haigh said.

So is a supercycle off the table? Not exactly, according to Haigh.

“We are not dismissing the notion of a ‘specific’ commodity supercycle. Indeed, significant incremental demand for commodities in green-intensive infrastructure packages is what is fueling the intense debate as to whether commodities are entering a new supercycle,” he wrote. “Perhaps, it is the definition of a supercycle in commodities that needs to be reviewed.”

Haigh said the “green revolution” is set to be “commodity-intensive.” Specifically, the process is set to be “heavily metal-intensive,” but SocGen doesn’t expect significant demand for all commodities.

And prices for metals could rise even faster if more regulation is put in place to achieve zero-emission economies in a very short time frame, he said.

“So, with flows reversing and prices stabilizing, there now seems to be more evidence that we are not entering a new commodity-wide supercycle,” he said.

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