LONDON- Commodity markets may be about to embark on another supercycle – a multi-year, broad-based, and usually large increase in prices – according to research published by some of the top investment banks involved in the sector.
But while many prices are likely to increase over the next couple of years, after slumping during the coronavirus pandemic, it is less clear this will mark the start of a supercycle rather than an ordinary cyclical upturn.
Even a cursory inspection of historical time series shows commodity prices exhibit cyclical behavior at all time scales, ranging from very short (minutes, hours and days) to very long (lasting months, seasons, years and even decades).
In a typical cycle, rising prices encourage more selling and production, and less buying and consumption, creating conditions for a subsequent price fall, before the pattern repeats.
In most cases, the cyclical behavior of individual prices shows only limited synchronization across commodity markets (“On the development and impact of commodity prices and cycles”, McGregor et al, UNIDO, 2018).
So the term supercycle is reserved for the largest price fluctuations and longest cycles, typically lasting more than 20 years from trough to peak and back again, involving an unusually broad spectrum of commodities.
Past supercycles peaked in the 1910s, 1950s, 1970s and 2010s, according to a study of prices for 40 agricultural, industrial and energy commodities by economic historian David Jacks.
He argues that supercycles have usually emerged from the consumption rather than the production side of the market (“From boom to bust: a typology of real commodity prices in the long run”, Jacks, 2013).
Previous supercycles were driven by the industrialization and urbanization of the United States and First World War, the reindustrialization of Europe and Japan after World War Two and China’s industrialization and urbanization in the 2000s. – Reuters