At the start of the year, JPMorgan analysts took a bullish stance, noting that “the world is likely to have entered its fifth commodity supercycle since the start of the 20th century”. By definition, a supercycle lasts for a minimum of 10 years. But this rise didn’t last long — prices for key industrial metals have already begun collapsing to 18-month lows — a trend that is likely to continue as we eye a looming recession.
The rise in commodity prices since the start of 2021 has been compelling. The London metals exchange (LME) index — comprising aluminium (42.8%), copper (31.2%), zinc (14.8%), lead (8.2%), nickel (2%) and tin (1%) — increased 50.4% between January 2021 and March 2022. During the same period, the S&P GSCI industrial metals index — which equally weights gold, silver, platinum and palladium — increased 62%. If starting from the lows of 2020, the price increases exceeded 80%.
SA’s commodity sector certainly benefited. Between March 2020 and February 2022, palladium and platinum prices surged just more than 100%. These increases were driven largely by economic recovery in China, the US and the EU. There was a cocktail of reasons commodity firms, shareholders and resource-rich countries felt optimistic. Developed countries implemented public works programmes to expand infrastructure, there was increased demand for vehicles and household appliances due to low interest rates, and the renewable energy outlook suggested high demand for commodities required for decarbonisation.
Some likened the commodity price surge since the start of the Covid-19 pandemic to the “Roaring ’20s” that followed World War 1, with hopes that this would be repeated a century later. The Roaring ’20s came during a commodity supercycle that lasted from 1899 to 1932, an economic boom period marked by increased demand for elastic goods due to cheap credit and increased employment, technological progress leading to the mass production of white goods, and large-scale infrastructure advances, particularly electrification.
Worst slump
The early signs were positive. Copper prices have often been viewed as an indicator of economic activity given the metal’s use in goods with moderate- to high-demand elasticity, such as vehicles, electronics, household appliances and construction. Earlier in 2022, copper prices traded at a record high, exceeding $10,600 a tonne. Investors flocked to the metal, with low interest rates leading to an increase in household demand for cars and electronics while pressure for climate mitigation after COP26 resulted in increased demand for electric vehicles, wind turbines and solar panels.
But the predicted supercycle fell short of 10 years. It ended quicker than it started. Sentiments deteriorated rapidly as policymakers and economists grappled with a potential recession. Demand for industrial metals has been hit particularly hard. Copper prices have dropped to an 18-month low and experienced their worst quarterly slump since the 2008 financial crisis.
In just four months, gains in the commodity market have largely evaporated. Since March, the LME index has fallen about 32.7% and the S&P GSCI industrial metals index 33.3%. Aluminium and copper have hit 18-month lows, while zinc and nickel are just behind. Exchange data from the LME suggests the drop has been a result of investors abandoning bets on rising prices.
This has had a significant effect on mining firms. In the last month, Rio Tinto’s share price has dropped 19.9%, Anglo American’s 34.3%, and BHP Billiton’s 18.4%.
This is likely to have devastating consequences for countries that were hoping to use foreign exchange from the predicted commodity supercycle to support public finances during the economic recovery from the Covid-19 pandemic. Two-thirds of emerging market and developing economies rely on commodity exports.
Price shocks
The loss in revenue is compounded by the potential for significant job losses within the mining sector. The decline in commodity prices during the global financial crisis translated to a loss of more than 14,000 jobs in Chile, 5,000 in Peru and 2,000 in Mexico. SA lost thousands too.
It’s hard to tell when things will recover. Research by Tony Addison and Atanu Ghoshray shows that shocks to metal prices tend to be short-lived and cyclical for metals such as lead, manganese, nickel, steel, tin, zinc and silver. However, for copper, gold and platinum, price shocks are unlikely to dissipate quickly and could be long-lived or permanent.
Platinum price trends support the notion of a secular decline. Prices reached $2,087/oz in April 2008 before sharply falling to $803/oz in November 2008. Prices have not crossed the $2,000 mark again. In fact, they haven’t crossed $1,500 since August 2013 and $1,300 since October 2014.
We’re all on the edge of our seats waiting to see what will happen in the coming months. But one thing is certain — what started as a rather bullish year for commodity prices has gone sharply bearish.
• Dr Baskaran, a development economist, is a bye-fellow in economics at the University of Cambridge.
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