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The World Isn’t in a Commodity Supercycle, but It Should Be

A brutal series of shocks has left markets ill-prepared for the challenges of the future.

Dave Ernsberger
Head of Market Reporting & Trading Solutions
S&P Global Commodity Insights

Simon Redmond
Senior Director, Sector Lead, Corporate Ratings
S&P Global Ratings

Published: January 13, 2023


Current commodity market conditions do not meet the requirements of a supercycle.

Commodity market stakeholders are grappling with a series of historic economic shocks that have not yet subsided.

An acceleration of the transition to lower- or zero-carbon energy sources will likely lead to a new commodity supercycle.

Commodity prices were rarely far from the headlines in 2022. With food prices soaring, fuel bills driving global inflation and government intervention in markets from Brussels to Beijing, it is easy to conclude the world is in a commodities supercycle. However, a closer study of commodity markets shows we are not. The noise in pricing signals driven by shock after shock is creating distress in markets, meaning we do not seem likely to enter one soon, either. But the longer shocks go on, the more the fabric of the markets frays. We are not in a supercycle, but maybe we should be.

A multiyear supercycle requires three indicators: Is supply surging? Is demand surging? Are prices surging? Without passing all three tests simultaneously, commodity markets are not in a supercycle.

A combination of surging demand, high prices and stagnant/falling supply indicates a market in decline. Spikes in coal prices as utilities flee from gas to coal fall into this category.

A sustained surge in supply with no change in (or falling) demand and soaring prices may signal a market beset by inefficiencies: Think of the container market spikes of 2021, driven by supply chain disruptions. It may also indicate reform being driven by policy change, as was the case with the rampant fuel prices in late 2019 as shippers adjusted to stricter environmental standards.

Surging supply and soaring demand paired with no appreciable ramping up in price equal a balanced market environment experiencing benign growth that lifts all boats, the equivalent of Mervyn King's noninflationary continuous expansion (NICE) economic theory. This typified the liquefied natural gas market of 2010 to 2018.

Today's Markets Fail All Three Tests

Looking across commodity markets, prices are generally higher than they were at the start of 2020, and undoubtedly volatile. Generally, though, markets fail each of these three tests. Demand is surging for commodity markets as a whole; demand growth has been underwhelming for most transport fuels, while sustained increases in demand are likely to be challenged by momentum building in recessionary sentiment. Supply is not surging either: Companies and investors are reluctant to finance supply, seeing market conditions and government policies as too impermanent or timing as too uncertain to warrant the kinds of up-front capital costs involved in new long-term upstream projects or infrastructure. The recent step-up in funding costs erodes the financial incentives for big developments too. 

A multiyear supercycle requires three indicators: Is supply surging? Is demand surging? Are prices surging?

Even price, the subject of so much scrutiny, tends to revert to the mean when distress eases. The triple whammy of COVID-19-related demand destruction, supply chain shocks as the world emerged unevenly from the pandemic, and sanctions on Russia arising from the war in Ukraine have created a nervous, reactionary pricing environment. However, prices should return to 2020 levels at the first sign of demand easing.

Indeed, supply is being curtailed by as much as 2 million barrels per day in the oil markets by cuts from the Organization of the Petroleum Exporting Countries Plus and its allies. Without those cuts, oil prices would arguably be significantly lower — hardly the stuff of a commodity supercycle.

Beyond the noise and volatility of the post-pandemic commodity markets, it is easy to see conditions in which a new supercycle could emerge.

A Supercycle Could Be Around the Corner

Commodity supercycles are surprisingly rare. The last generally accepted supercycle was 2003-2007, as powerful global economic forces were unleashed by China's reforms and accession to the World Trade Organization in 2001.

Looking beyond the noise and volatility of the post-pandemic commodity markets, it is easy to see conditions in which a new supercycle could emerge. The global population is thought to have reached 8 billion people on Nov. 15, 2022 — a striking milestone for commodity market watchers.

Per-capita consumption of commodities remains low in emerging market economies, particularly India, which is only at a relatively early stage of the emergence of a sizable middle class, the way China's economic profile developed at the start of the century.

A more aggressive commitment to the energy transition across G-20 nations could also create the conditions for a sustained surge in demand, supply and prices. Battery metals such as lithium carbonate are showing the sort of sustained price increases that suggest a bigger cycle is on its way, and hydrogen and carbon markets are in the earliest days of showing strong growth in both supply and demand.

Conversely, a return to classic energy supply sources in the medium term could also drive a supercycle as markets scramble to invest in traditional fuel sources. 

Today's markets are in the midst of the most brutal and sustained shocks for a generation, and a supercycle may not be far behind.

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This article was authored by a cross-section of representatives from S&P Global and in certain circumstances external guest authors. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.