[Global Focus] Bubble More Than Real Demand? Commodity Supercycle Falls into Paradox

Recent Bloomberg Commodity Index Plunges 2.4%... Key Question: Will Investment Enthusiasm Spread to the Real Economy?
Core Materials for Carbon Zero Economy Show Strong Prospects... Long-Term Oil Price Rise Remains Uncertain

[Asia Economy Reporter Park Byung-hee] Economic analysis firm Capital Economics analyzed that there have been four commodity supercycles over the past 120 years. Two of these were due to wars, and one was due to the oil shock. The last commodity supercycle in the 1990s was thanks to China's rapid industrialization.

The two wars and China's industrialization caused a sharp increase in demand, driving up commodity prices. The other commodity supercycle background, the oil shock, caused supply shortages, which led to rising commodity prices. At that time, mining companies and oil drilling firms drastically cut investments, causing supply to plummet. In short, the four past commodity supercycles were supercycles where commodity prices rose according to the principles of supply and demand.

Earlier this year, the global financial market saw a series of forecasts about a commodity supercycle (Super Cycle·long-term boom). In fact, metal, grain, and crude oil indicators surged sharply since January, supporting these forecasts.

On the New York Mercantile Exchange (NYMEX), the West Texas Intermediate (WTI) crude oil futures price soared to $67.98 intraday on the 8th. Compared to the year-end closing price of $48.52, this was a rise of over 40%. Copper prices, known as "Dr. Copper" for representing economic conditions, also hit an eight-year high.

Fifth Supercycle?

However, recently, the sharply rising commodity prices have shown signs of slowing down. WTI plunged 7.07% in a single day on the 18th (local time), marking the largest drop this year. As crude oil prices plummeted, the Bloomberg Commodity Spot Index fell 2.37% that day, the largest decline since mid-September last year. The Bloomberg Commodity Spot Index reflects prices of 23 commodities. On that day, corn futures fell 2.06%, coffee prices dropped 2.70%, and wheat declined 1.48%.

The global financial market has begun to harbor doubts once again about whether a commodity supercycle will truly come.

Alastair Munro, an analyst at commodity brokerage Marex Spectron, expressed skepticism about the possibility of a commodity supercycle, stating that the current rise in commodity prices is not due to demand. Munro pointed out, "Commodity prices have risen due to liquidity and inflation expectations rather than actual commodity demand."

Bloomberg diagnosed that the commodity market has fallen into a paradox. It analyzed that commodity prices have risen so much that they have become a negative factor for the commodity market by suppressing demand. Since demand is not supported, it diagnosed that there is a bubble in commodity prices.

Recently, the crude oil price plunge has fueled the supercycle controversy. This crude oil price plunge was also worsened by increased inflation concerns raised at the Federal Open Market Committee (FOMC) meetings on the 16th and 17th. After the regular monetary policy meeting, Fed Chair Jerome Powell said that inflation risks are not significant. He stated, "Even if prices temporarily rise above the Fed's policy target of 2% this year, we will keep the benchmark interest rate unchanged." Powell reaffirmed his stance that there are no plans to shift monetary policy to tightening through 2023, dismissing recent market concerns about inflation.

Powell's remarks led to interpretations that the Fed would tolerate inflation, increasing inflationary pressures. As concerns grew that inflation could damage the economy, stock and commodity markets plunged.

The Key is Real Demand

Ultimately, the key question is whether the heated investment enthusiasm in the current financial market will spread to the real economy and translate into real demand for commodities.

In this regard, Alberto Gallo, an analyst at UK asset management firm Algebris, also focused on the fact that central banks and governments are cooperating to stimulate the economy. Over the past decade, many central banks have taken active stimulus measures such as zero interest rates, while governments have been reluctant to implement stimulus measures due to fiscal concerns.

However, President Joe Biden believes that the recovery was delayed after the 2008 financial crisis because the stimulus scale was too small. Adding Biden's $1.9 trillion to the $900 billion approved by former President Donald Trump in December last year amounts to 13% of the US Gross Domestic Product (GDP).

Ian Lance, co-manager at investment advisory firm Temple Bar Investment Trust, said, "With monetary and fiscal policies working together, many signs of economic recovery are appearing," adding, "Inflation could arise not only in financial markets but also in the real economy."

Only What Will Rise, Rises

Experts advise paying attention to the massive economic transition related to climate change. They say there are clear signs of a supercycle related to commodities associated with climate change.

Last year, the COVID-19 pandemic increased awareness of environmental importance, and accordingly, more countries are accelerating carbon-zero policies. This year, companies such as Volkswagen, General Motors, and Ford have successively announced concrete plans to transform into electric vehicle manufacturers. Ahead of the United Nations Climate Change Conference (COP26) to be held in the UK this November, it is expected that governments' promotion of eco-friendly policies will gain momentum.

Copper, nickel, lithium, and cobalt are considered key materials for building carbon-zero economic infrastructure. These materials are essential components for solar panels, wind turbines, electric vehicles, and batteries. The price of lithium carbonate, a major material used in electric vehicle batteries, has risen nearly 70% this year alone.

Conversely, due to carbon-zero policies, the outlook for long-term crude oil price increases is pessimistic. Bank of America released a report last month forecasting that international crude oil prices could rise to a maximum of $100 per barrel over the next five years. However, it predicted that this bullish phase would not last long, expecting Brent crude average prices to be between $50 and $70 per barrel by 2026.

This content was produced with the assistance of AI translation services.