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Why this isn’t the start of a new supercycle

With commodity prices regaining pandemic-related losses, and some reaching highs last seen a decade ago, many observers think this is the start of a new commodity supercycle. We disagree.The recent price spikes are due to reduced supply amid severely disrupted mines and supply chains. Plus, a quick recovery in industrial production and robust global monetary and fiscal stimulus measures have increased demand. However, while we expect vibrant global economic growth over coming years, the magnitude of commodity demand growth won’t be the same as during the turn of the millennium, when China’s rapid industrialisation and urbanisation increased and powered the last supercycle. Partly supporting prices has been speculation, boosted by positive vaccine developments that improved this year’s outlook and raised consumer confidence. Commodity markets have benefited from ample global liquidity, which has lifted all assets classes. Energy markets have plenty of spare capacity, which will keep a lid on price increases over the medium term. Gold has already started to move lower amid improving optimism over economic growth. And the trends that saw iron ore surge last year look set to reverse as China plans to reduce steel production and Brazilian iron ore exports pick up. However, commodities linked to the green energy transition have upside potential in the long run. Copper looks particularly well-positioned to benefit because it faces few substitutes, and electric vehicles require three times more copper than do traditional vehicles.

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