The high degree of uncertainty around both supply and, more importantly, medium- to longer-term demand for most major commodities, makes it very difficult to conclude with high conviction that we have entered a new commodity super cycle. However, it is clear that the world has reached an inflexion point in combating climate change. Long-term stringent carbon emission reduction targets set by the world’s largest governments will have a material impact on many industries, making it highly probable that certain commodities will experience super cycle conditions over the next decade or two.

Commodity super cycles are generally demand-driven

It is generally accepted that commodity price super cycle bull markets are extended periods during which commodity prices are well above their long-run trend. The main drivers of super cycle bull markets since the late 1800s included:

• US industrialisation in the early 1900s.
• Reindustrialisation and reconstruction of Europe and Japan, following the Second World War, drove the 1950s and 1960s cycle.
• China’s acceleration of both industrialisation and urbanisation beginning in the early 2000s.

This illustrates that a commodity super cycle is likely to need a specific medium-term demand driver that distinguishes it from normal demand growth. Today, we potentially have two key recent developments that could generate a potential super cycle:

1. Decarbonisation brought on by increasing climate change. Governments have set long-term carbon emissions reduction targets, which help to grow the supply of renewable energy sources like wind and solar (and therefore materially adjust energy infrastructure). There are also consumer-driven behaviour changes such as the choice of electric vehicles (EVs) over internal combustion engine (ICE) vehicles. This shift is often incentivised by governments, such as through tax credits for buying EVs or penalties for auto manufacturers that do not improve the oil consumption efficiency of their new models.
2. Globally, central banks are using monetary policy to effectively fund fiscal policy, which includes the previously discussed increase in renewable investments, as well as direct stimulus payments to both corporates and households. These payments may change the disinflationary forces of the past 40 years, as governments and central banks understand the necessity of generating inflation to assist in paying down record-high debt levels.

Decarbonisation is a potential game changer for some major commodities

Given its excessive carbon emissions, the transition of the energy sector is likely to include:

• For primary energy consumption, moving away from fossil fuels, such as coal and oil, towards renewables like wind and solar.
• For transportation, moving away from oil used in ICE vehicles to EVs, which includes the need for lithium-ion batteries and significantly more copper, including for increased EV charging stations.
• While the global ICE vehicle fleet is likely to decline gradually in the long run, platinum group metals (PGMs) will remain in high demand, as a key input for the autocatalytic converters that reduce ICE vehicle carbon emissions.
• The expanded transmission infrastructure linked to less carbon-intensive, renewable energy sources. Batteries and copper will also be needed in energy storage, which will play an important role in the deployment of renewable sources like wind and solar that only supply energy at certain times of the day.

Inflation risk is highest in decades

A fundamental change was made by the US Federal Reserve last year in the way it tackles its key mandate of price stability and full employment. Changing to average inflation targeting and focusing on the low end of the employment spectrum has effectively changed the way it tries to pre-empt overheating in the US economy. This means that going forward, it will allow the economy and, by design, inflation, to run much hotter than any time since the 1970s.

Global investors concerned about the rising inflation risk often hedge by buying commodities. The chart below clearly shows that commodity investment is currently even higher than the peak reached in the China-driven super cycle. However, relative to the trillions of US dollars of COVID-19 monetary and fiscal stimulus and the size of other risk asset classes, total commodity investment of less than $700 billion is small and could increase materially if inflation risks continue to rise.