Some analysts believe a multi-year boom has started, but prices have faltered in recent times

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WHEN THE covid-19 pandemic first struck, the world’s appetite for raw materials collapsed. As demand fell, so did prices. Still, it wasn’t long before they took to the skies again. Some enthusiastic analysts were quick to proclaim a new commodity “supercycle”, an extended period of high prices. To support their theory, they cite resurgent economies, a growing enthusiasm for the type of “green growth” that eats up minerals, and supply shortages. Yet in May the price rally stumbled, giving credit to supercycle skeptics who insist the recovery is temporary. Who is right?

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A recovering global economy is undoubtedly benefiting commodities. In the previous supercycle, which started around 2000 and lasted until 2014, China sucked raw materials. Today he buys mountains of everything from copper to corn again. This is one of the main reasons why the Bloomberg Commodity Index, a broad price measure, has risen 54% since April 2020. Another index, produced by The Economist, increased by 87% over the same period (see graph). Rich economies, too, are shaking the pandemic. Optimists predict a decade of meteoric growth. Businesses cheerfully invest in physical capital. Governments plan to splurge on infrastructure projects: President Joe Biden wants to spend $ 1.7 billion on the United States. These plans will swallow up raw materials.

So will the focus on green growth. Wind power plants contain nine times more minerals than gas plants, according to the International Energy Agency (IEA). Electric cars require six times more minerals than those powered by combustion engines. To meet global climate targets, the IEA calculates that the consumption of lithium, which is used in batteries, must be increased 40-fold by 2040. Prices have doubled so far this year.

Supply constraints add to the gains in raw materials. China is reducing its steel production for environmental reasons. Dry weather adversely affected maize production. The pandemic has hit South America’s mining industry. The shortages could drag on and on. The development of new mines takes a decade. By 2025, Goldman Sachs, a bank, will see the price of copper, commonly used in green technologies, increase by half. In recent weeks, it has reached an all-time high. The price of iron ore too.

But skeptics argue that a one-year rally is not enough to predict a supercycle. They underline the contrasts with the previous supercycle. Second, a rapidly urbanizing China was in the grip of a construction craze. The country is now at a very different stage of development, argues Paul Bloxham of HSBC, a bank, casting doubt on the sustainability of its current infrastructure frenzy. The Chinese leaders are more wary than their predecessors of borrowing to build. They also fear that rising commodity prices will fuel inflation. The authorities recently warned producers against monopoly behavior and investors against commodity speculation. This caused the latest price drop.

Energy markets are also very changed. Today’s American shale drillers can intelligently ramp up production when needed, helping to cap prices. Demand is lukewarm, however. Despite this, on June 1, OPEC and allied oil producers (notably Russia) decided to stick to plans to gradually increase supply. Ten years ago, oil was over $ 100 a barrel. Although prices have been rising lately, today a barrel of oil costs just $ 71. Looking ahead, a breakthrough in talks between the United States and Iran over its nuclear program could lead to the lifting of sanctions, triggering an influx of Iranian oil into world markets.

Noting the bleak outlook for dirty fuels, some experts predict an “ex-supercycle of energy commodities”. The recent drop in commodity prices has been slight and they seem to be on the rise again. Citibank has detected a buying opportunity in the trough. Goldman Sachs has followed suit, rocking copper and soybeans, whose supplies are tight, to climb even further. In the 2000s, betting on a pan-commodity supercycle was profitable. In the 2020s, the loot can go to those who can spot individual thieves.

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