Soaring Commodity Prices: A New Supercycle Or Corona-Crisis Aftermath

(16 February 2020) The rise in commodity prices over the past three months has led experts to speculate about the beginning of a new "supercycle" and an extended period of rapid price expansions in the commodity markets. The idea of commodity supercycles is not new. Eighty-five years ago, Russian economist Nikolay Kondratieff has published his famous article describing how the depreciation of capital assets, changes in interest rates, and innovation activities generate "the cyclical dynamics of the capitalistic social order" and an above-trend movement in commodity prices over a period of years. But given that only 10 years have passed since the last peak, does the recent rally in commodity prices indicate the beginning of a new supercycle?

• The commodity index constructed by Knoema shows that the most recent commodity supercycles occurred in the second half of the 1970s and subsequently at the end of the 2000s, with a gap of 3 decades in between. And yet, only 1 decade has passed since the very last supercycle peaked in the late 2000s.
• Governments across the world have put together pandemic stimulus amounting to a total of $13.8 trillion, equivalent to 16% of the world's GDP. Coupled with extremely low interest rates these factors alone will have a significant upward impact on prices. The same thing happened right after 2008 when quantitative easing programs increased global liquidity and inflated nominal commodity prices in 2010-2011.
• COVID-19-related slowdown and the quick recovery in the second half of 2020 had been accompanied by structural changes in consumer demand, disruptions in global trade and value chains, which caused a rise in prices in specific markets (semiconductors and sea freight). Not to mention cold winter weather in the northern hemisphere which supports fuel demand and pushes up oil and gas prices.

Whether it is a new supercycle or not we will only know in a few years. At the moment, the global economy is still subject to stress brought on by the new COVID-19 strain, potential disruptions in vaccine rollout, and a high stringency of pandemic restrictions.