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Commodity prices are forecast to remain high until at least the end of the year. Photo: Reuters

Is a commodities supercycle looming, and what risks does it pose for China?

  • Soaring commodity prices have stirred debate about whether the world is entering another commodities supercycle
  • A long-term trend of high commodity prices could sting Chinese manufacturers and hurt recovery from the pandemic

Booming commodity markets are fuelling debate in China about the potential impact of a commodities supercycle, which could saddle producers with high costs for years and pose a major threat to the country’s economic recovery from the coronavirus pandemic.

Commodities fell slightly last week from recent record highs after the US dollar strengthened and Chinese authorities took steps to intervene in the market, but raw material prices are expected to remain buoyant until at least the end of the year.

Amid concerns of an extended upswing in prices, some economists are asking whether the global economy is entering a rare supercycle, where commodities trade above their long-term price trend for a prolonged period of time.

Early this year, Goldman Sachs said the global economy was on the brink of a new commodities supercycle driven by post-pandemic growth.

It is clear that a super boom will be followed by a super bust, which will be very destructive to the

“Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play,” the investment bank said.

Only four commodities supercycles have been identified since the 19th century, including in the early 2000s as China and other emerging markets rapidly industrialised. That boom turned into a bust after the global financial crisis hit.

Feng Mengxiao, chief economist at a subsidiary of the state-owned China Grain Reserves Group, said there was only a “fleeting” chance of avoiding a new supercycle.

“Looking at the historical experience of the 2008 global financial crisis, it is clear that any super boom will be followed by a super bust, which would be very destructive to the Chinese economy,” she wrote last week in the Economic Observer.

A supercycle is usually driven by structural change in demand across the world, such as the industrialisation of the United States or post-war reconstruction in the 1950s.

Despite the fact central banks and governments are rolling out massive stimulus measures to aid post-pandemic recovery, many analysts do not expect this boom to be enough to fuel a new commodities supercycle.

David Jacks, an economics professor at Singapore’s Yale-NUS College who has studied the history of commodity markets, said nearly all commodities are poised to rise further this year and certain materials, copper above all, are favourably disposed for multi-year rallies.

“But does this constitute the beginning of another supercycle as we saw from 2000-2010? Probably not,” he said.


China’s economy expands record 18.3 per cent in the first quarter of 2021

China’s economy expands record 18.3 per cent in the first quarter of 2021

High commodity prices would raise costs for producers and restrain economic recovery from Covid-19, but might also feed into higher inflation, which would not be popular in an environment where wages are not rising as fast, Jacks said.

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said he did not agree a supercycle was looming, as they usually last for years or decades, but he believed the commodities price rally will continue until the end of this year.

China’s top economic planning agency said last week it would release state reserves of non-ferrous metals at “appropriate” times to curb runaway prices, amid concerns the commodities rally was pushing up producer prices.
Factory-gate prices in China hit a 13-year high in May due to surging commodity prices, highlighting global inflation pressures caused in part by policymakers’ efforts to shore up the virus-hit economies.
Government measures can only temporarily curb prices, which ultimately depend on the pandemic control and global economic recovery
Ding Shuang

China’s National Food and Strategic Reserves Administration also pledged last week to release supplies of copper, aluminium and zinc to non-ferrous downstream processing and manufacturing firms through public bidding, without confirming exact amounts.

Analysts said releasing state reserves of non-ferrous metals would offer better prices for downstream users, but the result would not be significant.

“Government measures can only temporarily curb prices, which ultimately depend on the pandemic control and global economic recovery, as well as fiscal stimulus particularly by the United States,” said Ding.

“China may no longer have a driving effect on commodity prices, because its policy is already on the road to normalisation.”

Ding said the effect of high commodity prices on China’s growth would depend on how fast prices rise, with exporters expected to suffer less than companies focused on the domestic market, because they can pass on high costs to some overseas customers where demand is still rising.

Commodities used in the transition to carbon-neutral and more sustainable economies will be most susceptible to prolonged high prices, according to Alessandro Sanos, global director of commodities sales strategy and execution at Refinitiv.

“The switch to low-carbon energy is already providing a significant boost to the metals and minerals needed to build renewable energy infrastructure and produce the batteries that support the electrification of the economy and the expansion of the electric vehicles fleet,” Sanos said in a note last month.

“Perhaps what we are facing is the overlay of several cyclical upswings with the acceleration of a new mega-trend, the transition to a low-carbon economy.”

This article appeared in the South China Morning Post print edition as: Risks ahead for china if ‘supercycle’ occurs