Reasons why we are on the cusp of a commodity super-cycle affecting South America

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The following two decades are likely to be a series of supply squeezes for a variety of reasons

As 2024 unfolds, the surge in commodity prices has been nothing short of spectacular, with sectors such as metals, energy, and agriculture all registering significant gains. This trend is not merely coincidental but indicative of a burgeoning commodity super-cycle driven by three key factors:

  • A pivot back to tangible assets
  • Demographic shifts
  • The global energy transition

What drives commodity super-cycles?

Historically, commodity super-cycles have been triggered by periods of intense industrialisation and economic expansion in major economies, such as the United States in the early 20th century and China in the early 21st century. These cycles are characterised by a significant lag between the growth in demand and the expansion of supply, leading to prolonged periods of rising prices. 

The current globalized economy means that these cycles are influenced by worldwide factors rather than isolated regional developments. 

For instance, although India’s rapid development contributes to demand, the overarching cycle is globally interconnected.

We believe the difference this time is the cycle will be globally driven, and the next 20 years could feel like a game of supply-gap “whack a mole.” 

Return to tangible assets.

The fiscal and monetary policies of the past decade have heavily influenced equity markets, which are characterised by significant central bank money printing activities, especially noticeable after the Global Financial Crisis (GFC). 

The US government debt has skyrocketed to a staggering $34 trillion, growing by $1 trillion every 100 days, with similar global trends. This unsustainable path has increased reliance on the U.S. dollar, which holds the world’s reserve currency status. However, as debt levels continue to climb, there is a noticeable shift towards real assets. Investors, wary of currency devaluation, are increasingly turning to traditional stores of value like gold and silver. Cryptocurrencies, which often track the movements of tech-heavy indices like the Nasdaq, will likely suffer initially, but once the dust settles, they will look like an attractive alternative.

Demographics and urbanisation

The world’s population growth has slowed, but the resource demand continues to increase. This is further compounded by significant urbanisation; over the next three decades, two billion people are expected to move to urban areas in a historic migration. While urban living typically suggests improved energy efficiency, the reality points to increased energy consumption and reduced numbers of primary producers, like those seen in China’s recent urbanisation phase.

In the last two decades (2001-2019), China’s food imports skyrocketed by 2900%, reflecting the reduced agricultural output and increased urban demand. This demographic shift amplifies demand for housing and consumer goods. It stresses the farm sector, where increased productivity must meet growing global needs amidst competition for vital resources like fertiliser components.

Fertilisers will play a crucial role in agricultural productivity. Phosphate rock and sulfuric acid are the primary raw materials for manufacturing phosphate fertilisers. However, the production of fertilisers is challenged by the competition for key ingredients, such as phosphates and nitrates, from other industrial sectors, particularly mining. 

The energy transition

The urgency of combating climate change has accelerated the shift towards sustainable energy sources, reshaping commodity markets. This transition, endorsed globally by agreements like the Paris Accord, is causing fluctuations in commodity demand—particularly for those critical to renewable technologies. Elements like lithium, copper, and uranium are experiencing what might be termed “super squeezes,” where short-term supply shortages are precipitated by robust demand. 

Let’s take copper and uranium as an example. 

Uranium has had a triple shock with production falls, geopolitical issues and regulatory changes. 

At the COP28 summit, a commitment to tripling nuclear power capacity within 15 years highlighted the global consensus on scaling up clean energy solutions. Yet, immediately following, leading uranium producers announced significant cuts in output due to shortages of essential materials like sulfuric acid. In addition to this, the US’s recent decision to ban Russian imports and a “squeeze” are highly likely.

Copper, on the other hand, has different issues as major global mines come to the “end of mine life.” The low copper price over the last two years has seen little development or exploration, and demand for the energy transition will increase rapidly as major infrastructure is turned over at a rapid pace in the coming decades. 

Source: Mark Gardener – Live Wire


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