In today’s Exponential Investor:

  • Click on link to complain if you need!
  • Industrial metals take a beating
  • Will this be the longest commodities supercycle in history?

Well, it appears I’ve had a bit of a commodities love-in this week, haven’t I?

In Sam’s absence, I’ve accidently gone back-to-back rock chatter. So far this week, we’ve covered how we haven’t spent enough cash shoring up future reserves, and what comes before every commodities boom. Sorry to disappoint you, but today will be no different.

If you’re mad me for the ongoing natural resources talk, drop me a line here and tell me so. Or if you’re out on a run and suddenly have a specific commodity related question, use the same link and put “For Shae” in the message box.

Now… where was I?

That’s right. More rocks and resources talk.

Eighteen-year-old me would have written 41-year-old me off as a loser, but I think rocks are cool. Perhaps it’s the Australian in me (remember, Australia is pretty much just over-priced houses and holes you can see from space).

Jokes aside, my fascination for the commodities market is simple. It’s massive and almost impossible to know everything about in one lifetime.

Commodities are so much more than rocks underfoot that are dug up and relocated. Rather, they are a complex, interconnected web that provide us with the very basics for our lives.

Yet, as with many things, the problem with the commodities market is that when everything is running smoothly, we never notice. It’s only when things go bang that we mere mortals at the end of the supply chain discover how fragile this web of things is…

Yikes, the charts look bleak

During my usual morning coffee and media trawl, I discovered that not everyone is as excited at the moment, with noting that industrial metals prices are taking a beating:

Industrial metals are on track for the worst quarter since the 2008 financial crisis as prices are pummelled by recession worries. Copper, the great economic bellwether, has ricocheted into a bear market from a record four months ago, while tin just tumbled 21% in its worst week since a 1980s crisis froze London trading for four years.

It’s a dramatic reversal from the past two years, when metals surged on a wave of post-lockdown optimism, inflationary predictions and supply snarls. Now, inflation is here and supplies are still tight. But prices are plummeting as worries about a slowdown in industrial activity across major economies dovetail with slumping demand in China.

Yikes. The worst quarter since 2008? What does that look like on a price chart?

Well, not great…

Industrial metals don’t look healthy
(Copper, blue USD LHS; tin, green USD RHS)

Source: Trading Economics

That’s a mighty big fall for tin. Copper doesn’t look too healthy, either.

When you zoom out, you may wonder if what I wrote on Tuesday about the copper price faring well conflicts with a longer-term chart.

It doesn’t.

Given that the likelihood of slowing economic growth in two of the world’s biggest economies – the US and China – the copper price is holding its ground surprisingly well. That said, the chart shows just how sensitive these two industrial metals are to economic activity.

So, it makes sense that these metals are susceptible to dipping on threats of a synchronised slowdown. That’s fine. The way I see it, it just gives you more time to prepare for what comes next…

Multi-decade bull market incoming

Depending on your financial rag of choice, you’ve probably seen the word “supercycle” thrown around a lot in the last 12 months.

I noticed more and more publications were using it early 2021 as pandemic-related bottlenecks intensified.

A supercycle in financial markets simply means a long period of growth and economic expansion that requires materials to meet increasing demand for goods and services.

A commodities supercycle is an extension of that. It means a multi-decade ­– at least ten years, but up to 35 – where there is insatiable demand for all raw inputs driving prices up.

These commodity supercycles are more than a simple “commodities boom”, where a group of closely related raw materials experience price growth together. The “supercycle” part of it means that almost everything in the commodities basket will be lifted higher. Agriculture, energy sources and metals all come under extreme pressure on the back of unexpected demand.

The thing is, we’ve had a few now, and the demand isn’t that unexpected when you look at history.

Economic historians agree that there have been four commodity supercycles in the past.

The first was the late nineteenth century industrialisation of the US, which lasted up to the 1910s.

The second started with the “rearmament” period of the 1930s, extending into the post-World War Two reconstruction in Europe and Japan and receiving a tailwind from baby boomer consumerism in the United States.

The third was the oil-price shock of the 1970s which lifted the price of everything.

The fourth was China’s rapidly industrialising its economy in the early 2000s.

And what drove each of these supercycles was unexpected demand from rapid industrialisation and urbanisation of millions and millions of people.

The kind of demand that a possible tenfold increase in electric vehicles by 2030 would bring…

Or the kind of demand that 2050 net zero targets would create…

Or the kind where China aims to lift its population urbanisation rate from 64% to 75% in a little over a decade…

Or the kind that comes from India trying to double its urban population by 2030…

These are just a handful of examples that will put a squeeze on the commodities needed to meet goals.

Copper, tin and most other commodities are tanking today. Perhaps even for the next few months, too, as we adjust to the looming recession.

But don’t get trapped into short-term thinking.

A significant lack of investment and extreme hunger for raw materials is coming… and commodities prices are going to rise.

Until next time,

Shae Russell
Co-editor, Exponential Investor