History of Commodity Cycles Suggests Prices Do Not Go Up Forever
The history of commodity cycles can last for years. There is likely more to go in the current boom part of the cycle. However, they have shown strong patterns of boom and bust over decades. Sometimes it is supply shortages in the case of weather issues or disease (or current the labour shortages or under investment). In other cases, spikes in demand permanent or temporary have caused big swings. Often, on the temporary side, it is investment demand that can be fickle. Permanent increases in demand like population growth or in the case of copper, new technologies that demand more. The chart below is the MSCI World Metals (investable) Index (ex-precious) that includes copper, zinc, nickel, aluminum and steel company exposure. It is clear the boom cycle can last years. But the bust cycle is often quite painful. Supply and demand come back into balance and prices normalize (with an upward inflationary bias).
MSCI World Metals & Mining (investable) Index (ex-precious) PICK.N
It is clear we are coming close to previous peaks and that likely suggests that prices should cool off soon. But there are several factors around infrastructure demand and investment that suggests the cycle can continue. How long will depend partly on the degree that real demand takes over from the speculative investment demand that is currently driving markets. As all should know that speculation usually front runs the real demand. To date, very little has been spent on fixing decaying infrastructure. And to the extent that copper demand is anything beyond speculative a this point it is more about supply shortages than fundamental changes in longer-term demand. When it comes to copper, we are likely early in this cycle given the shift to greener energy use and creation over the more traditional carbon-based history. This is a true fundamental change more than a temporary factor.
But as commodity cycles go, the cure for high prices is high prices and the supply response will come. It always has, but it can take years in the case of mining. Less so in the case of soft commodities. Have a look at the long-term history of corn and soybeans. The difference between soft and hard commodities can be huge. Food has a life cycle. Commodities like copper do not. Storage is relatively easy compared to crude oil. The negative futures prices in the wake of the world demand shock for COVID was an example. Easy enough to fnd a place to store excess copper.
Corn and soybeans spikes tend to be far more weather, and disease based than other factors. The supply response is much faster too compared to mining that often requires years and massive capital to move. The farmer more simply needs to plant more corn or beans over wheat to maximize profits.
Over time, prices rise in line with longer inflationary trends, but technology has been a massive factor in lowering costs. We wonder if the best of that productivity gain is behind us. The number of people needed today to farm is a small fraction of what it was and the use of technology like GPS driving your combine.
In the case of crude oil, it’s a very different story. Copper demand is on the upswing to be sure, demand for crude oil may well be past the best before date. Peak demand may be closer that some would like to believe.
So when we talk about a commodity bull market, it matters what commodity you are talking about. To be sure, it will be a significant factor in the coming years. For some, it is a supply shock spike (crude) that largely is transitory. For others (copper, aluminum), it is likely a more permanent shift. For others (softs) it is likely a supply shock that likely shifts to a higher base price due to the reduction in cost of production savings.
There are many ways by way of ETFs to invest in commodities. But futures markets have their challenges and typically are not recommended for longer-term investments. It is often much better to invest in the companies that will benefit from these changing dynamics.
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