Identifying the intersection of the demand and supply is a fundamental mechanism involved in the calculation of prices for various goods and services. Equilibrium is attained when demand matches supply at a specific market price. An increase in demand at a given price (assuming constant supply) will lead to a surge in market prices and vice versa. Commodity price movements are a regular phenomenon, driven by changes in demand and supply. However, an extended period of volatility in commodity pricing might indicate a commodity supercycle. Read on to learn more about what it means and why it matters.
What is a commodity supercycle?
A commodity supercycle can be defined as an extended period of rising commodity demand that leads to a surge in commodity prices. These supercycles are generally driven by other economic supercycles. It is usually characterised by increasing demand for different energy sources, manufactured goods and raw materials. The supercycle phenomenon is more pronounced in the commodities sector than in the broader economy. It is because of the time lag required to build up production capacity to meet the increase in demand.
Most historical commodity supercycles lasted over a decade due to a constant increase in commodity demand. These supercycles can result from various economic catalysts. During this period, supply shortages cause prices to soar. Commodity owners invest their funds to boost production capacity and meet the new increase in demand. However, increasing production capacity requires time. Demand usually falls by the time new production channels are ready for supply. When supply eventually increases thanks to the higher production capacity, commodity prices crash, as the demand has already gone away.
Commodity boom vs supercycles
Most people often fail to differentiate between a commodity price boom and a supercycle. Commodity price booms are usually short-lived cycles resulting from conditions such as supply shock, crop failure or mine closures. All these events can lead to a temporary decrease in supply, which makes demand greater than supply, and hence a price rise. The nature of trigger events is temporary and has limited exposure. However, commodity supercycles are characterised by a sustained period of increase in demand due to expansionary economic activities, such as the construction of roads, infrastructure development and innovations in the energy sphere.
Commodities in high demand during a supercycle
Demand increases exponentially for two commodity segments during a supercycle: metals and energy. Both of these are essential for industrial development. Here are some industrial metals and energy commodities whose demand surges during a supercycle:
- Iron ore
Iron ore is an industrial metal used primarily for producing steel, which is extensively used in the construction of commercial spaces and bridges.
- Aluminium
Aluminium is also a widely used industrial metal, used a diverse range of products from window frames to aeroplane parts and electrical transmission lines.
- Copper
Copper is an extensively used industrial metal. It is used in electrical elements, including wiring, motors and other electrical components. It is also a key component in roofing plumbing and heat exchangers.
- Crude oil
Crude oil is an energy commodity. It is used to produce jet fuel, gasoline and diesel. In addition, these products are heavily used as fuel for transportation and machinery.
- Natural gas
Natural gas is an energy commodity that is used as an alternative to liquid fuels. It also helps in power generation.
- Coal
Coal is an essential energy commodity widely used to produce power and manufacture steel.
Why do supercycles matter?
Commodity supercycles must be closely observed to keep a check on the economy. A sustained period of increase in demand for different commodities could skyrocket inflation. This will increase the cost of all general goods in the economy, which will create hardships for consumers. Commodity supercycles can have broader and more pressing consequences that can change the course of history. Metal and oil-rich countries could get unfair advantages, which might result in abuse of power. Furthermore, a massive increase in the price of everyday goods on account of inflation can cause civil wars and give way to global geopolitical tensions, which may lead to an economic downfall.
