Commodity prices have rapidly rallied as supply chain weakness and war in Europe converge with surging demand for materials used in green energy technology, pushing the market towards a new supercycle.

The structural changes underpinning recent price gains are expected to keep prices for raw materials elevated for a longer-than-usual period of time as suppliers fail to meet demand from consumers.

Markets are traditionally cyclical beasts, moving through phases of boom and bust that last an average of five and a half years each.

Under some circumstances however, these timeframes are drastically altered and select markets go through extended periods of price expansion, resulting in massive price gains for certain assets as demand outstrips supply.

These rare supercycles push asset prices to record heights and can continue on for more than a decade – like the previous one, which stretched from 2002 to 2015 and saw oil reach an all-time high of over US$140 a barrel.

Supercycles are triggered by structural changes to market dynamics. In 2002, for instance, rapid industrialisation in China saw demand for commodities skyrocket, and dragged prices along for the ride.

Now, analysts such as Goldman Sachs say the meteoric rise in commodity prices currently gripping markets could be the start of a new supercycle, spurred on by changes in the demand story following COVID.

Green energy gets a green light

As COVID’s grip on global economies loosens and governments deploy capital to help rebuild their plague-stricken economies, a particular focus has been given to the so-called ‘green revolution’.

Spending on green energy technology hit a record US$755 billion in 2021 as governments sought to cut their emissions with renewed fervour and stronger policy action.

Most of that money ($731 billion) went into renewable and nuclear energy projects, energy storage, electrified transport and electrified heat. 

The technology underpinning these, however, relies on large quantities of metals, particularly nickel, copper, cobalt, lithium, and rare earth elements (notably neodymium and praseodymium) for batteries, cathodes, wiring and more.

Demand for each of these metals (excluding cobalt) is expected to readily outstrip supply within the next 5-10 years, which the International Monetary Fund says could send the price of these commodities “surging for many years”.

“Replacing fossil fuels with low-carbon technologies would require an eightfold increase in renewable energy investments and cause a strong increase in demand for metals,” the IMF noted.

“However, developing mines is a process that takes a very long time – often a decade or more – and presents various challenges, at both the company and country level.”

Current production capacity cannot meet surging demand, the IMF said, and these supply constraints will likely put upward pressure on prices.

Speed wobbles hit energy prices

The rush to decarbonise global energy grids has resulted in investment dollars being shifted away from the fossil fuel sector and into greener fuel sources such as solar and wind.

Although the long-term trend appears to be away from fossil fuels, newer renewable sources haven’t yet demonstrated the scalability that oil and gas offer, and the rapid shift to green power may have been a contributing factor to the European energy crisis that pushed energy prices up 17.4% in the summer of 2021.

Australian minister for industry, energy and emissions reduction Angus Taylor cautioned that recent reticence to invest in new gas put a squeeze on supplies, leaving Europe short when gas-fired power was needed to cover energy deficits caused by a ‘wind drought’ that plagued the continent.

“Under ESG pressures, a lot of companies [are] refusing to make investments in gas in Europe, and countries [are] preventing them from doing it, and that has left Europe with an energy, and particularly gas, shortfall,” he said.

Russian conflict pushing prices even higher

These longer-term trends have been accelerated in recent weeks by Russia’s bloody and prolonged campaign in Ukraine, which has put already inflated commodity prices on course to record their sharpest gains since 1979.

Both Russia and Ukraine are leading global producers of nickel and copper, and both countries play an important role in the export and manufacture of other metals like palladium.

Russia is also Europe’s chief source of natural gas, and although sanctions imposed on the invaders have yet to include the energy sector, the ongoing conflict threatens to further upset the gas market.

Most recently, Russian President Vladimir Putin signalled plans to force ‘unfriendly’ countries to make their gas purchases in roubles in a bid to force foreign nations to purchase Russia’s ailing currency.

The value of the rouble has fallen to record lows in recent weeks after biting sanctions implemented by Western democracies kneecapped the Russian economy.

Putin’s demand that gas be paid for in roubles provided some small support for the currency, while gas prices lurched higher in the announcement’s wake.

Capitalising on commodities 

Reach has access to a wholesale investment that provides exposure to the Diversified Commodities Index. The index is designed to benefit from a broad-based rally in commodities driven by changing government policy. 

Investors gain long exposure to a basket of 12 commodities across three distinct commodity sectors – industrial metals, precious metals and energy.

If you would like to know more about this wholesale opportunity and request the information memorandum, please click here.

You should read the IM in full before making any decision on this investment. Any advice is general only and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. Reach Markets are the advisors assisting with the management of this offer and may receive fees depending on whether an offer is taken up by investors. Past performance

Sources:

• Capital.com, The commodity supercycle is here to stay, these 7 charts show
• The Motley Fool, What Is a Supercycle?
• Reuters, Goldman proclaims the dawn of a new commodity supercycle: Andy Home
• The Guardian, This article is more than 1 year old Green economy plans fuel new metals and energy ‘supercycle’
• The Guardian, Unless we act, escalating commodity prices will cause a decade of global turmoil
• Financial Times, A very different kind of supercycle
• BloombergNEF, Global Investment in Low-Carbon Energy Transition Hit $755 Billion in 2021
• Carbon Brief, Explainer: These six metals are key to a low-carbon future
• Money Week, The case for nickel – a crucial metal in the Green Energy Revolution
• The Conversation, Lithium is finite – but clean technology relies on such non-renewable resources
• The Conversation, Five essential commodities that will be hit by war in Ukraine
• IMF Blog, Metals Demand From Energy Transition May Top Current Global Supply
• Forbes, Energy Crisis 2021: How Bad Is It, And How Long Will It Last?
• Forbes, How Europe Triggered An Energy Crisis, And Now Is Paying Dearly For It
• European Union Institute for Security Studies, EUROPE’S ENERGY CRISIS CONUNDRUM
• The Hone Angus Taylor MP, Interview with Chris Kenny, Sky News
• ABC News, EU agrees on Russia sanctions so far, but energy divides
• Reuters, Putin wants ‘unfriendly’ countries to pay for Russian gas in roubles
• Reuters, Russian rouble dips in Moscow, down near 25% over 4 weeks
• Rystad Energy, Nickel demand to outstrip supply by 2024, causing headaches for EV manufacturers
• Kitco, Copper boom likely to last for decades, prompting a global hunt for new supply
• Aljazeera, Russian rouble plunges to record low amid outrage over Ukraine
• S&P Global Market Intelligence, Global cobalt supply deficit ‘not as dire,’ analysts say
• Adams Intelligence, UBS Rare Earth Forecasts Only Tell Half the Story
• NS Energy, Lithium prices could triple by 2030 as demand outpaces supply