China’s long boom, like so many industrial revolutions, relied on pulling people and things into the cities. That contributed to the commodities “supercycle” of the 2000s. The entry of about a billion people into the global economy raised demand for iron, copper and oil. Factories needed raw material as well as workers. While the country’s population probably fell last year — although China’s official census data, to be published on Tuesday, may say otherwise — commodity prices are still rising.
On Monday in Singapore iron ore futures prices reached a record in dollar terms, increasing by 10 per cent during the day’s trading. The metal, used in the production of steel, is not alone. Copper prices have similarly hit record highs. Aluminium prices have rallied, as has timber. The price of palladium, used in catalytic converters for cars, has risen. Even the prices of agricultural commodities such as crops and livestock are higher.
While China may not play the role it did in the last period when commodity prices surged, predictions of another supercycle are not without foundation: attempts to reduce advanced economies’ fossil fuel emissions and rising US infrastructure spending will mean more demand for certain metals and other materials — copper, as well as lithium, is vital to make electric cars. The green transition has had an effect on supply, too. Few fossil fuel companies are investing as they once did in exploration and production.
Right now, short-term factors are playing a role. Lockdowns have meant that consumer spending in rich countries has switched from services to goods, increasing demand for the raw materials that go into producing consumer electronics. Meanwhile closures — a freeze in Texas shut refineries, for example — have led to bottlenecks. This combines with a faster than anticipated reopening, leading to higher consumer demand in rich countries. Commodities also appeal to investors looking for a way to bet on the recovery and hedge against inflation.
When these factors start to fade there are longer-term trends to consider. Even if China’s population is shrinking, it is growing richer. While government investment spending on the kind of infrastructure that requires steel and copper is helping to drive the immediate recovery from the coronavirus pandemic, eventual rebalancing towards consumer spending will boost sales of cars and white goods. Lower state spending on high-speed rail does not mean the end of demand for industrial metals.
Rich country governments, led by the US, are also planning increased infrastructure investment in ports, roads and highways. That, too, will fuel demand. So will replacing internal combustion engines with electric ones and building the infrastructure to charge their batteries. The green revolution will require some of the same materials as the industrial one.
Not all of them, though. While oil prices have risen along with lithium, this partly reflects lower supply. The Opec cartel has restricted output and could increase it as prices rise. But other oil and gas majors cut spending last year when the pandemic forced an end to international travel and other economic activity; many are preparing to adjust to a world with structurally lower demand. US shale, which met most of the world’s demand growth since 2015, is no longer growing.
China’s role as the world’s workshop in the 2000s lifted all boats. If there is to be a repeat of the supercycle, with prices rising beyond their long-term trend, it will not be an exact replica. This time there are likely to be very different stories for different commodities.