Senior Vice President, Vice Chair Metals and Mining
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Taking young children on a long journey is fraught with challenges, not least the inevitable question a few minutes after leaving: are we there yet? The same could be asked about the much-discussed ‘next’ supercycle.
With the post pandemic bounce in full swing, rampant end-sector demand, supply constraints and healthy prices, the natural resources sector has plenty to smile about. Yet commodities risk becoming a victim of their own success as inflation rises. The unravelling of quantitative easing, combined with tax rises, could prompt a sharp slowing of global economic activity. Nevertheless, the narrative that the supercycle has already started remains.
This begs the question, has the permanent step change in demand that defines a supercycle already happened? And if not, when will it happen, if at all?
Demand slows as the global economy returns to a new normal
Over the next few years, it seems inevitable that the global economy will slow from its frenetic pace in 2021. Inflation is on a high, prompting central banks to signal a rising interest rate cycle and at least the start of the unravelling of quantitative easing. These two acts in themselves will inevitably lead to a slowing of economic activity, which will impact commodities demand.
Debt servicing costs will also increase as a result of rising interest rates. Tax rises are inevitable, not only to pay down government debt but also to go some way to help fund ambitious ‘build back better’ infrastructure plans. Restocking and the release of pent-up consumer demand has obviously helped economic recovery, but this is something of a one-trick pony that won’t be repeated this cycle. Whether we’ve also borrowed demand from future years in the mad scramble to buy products, only time will tell.
For many metals and mined commodities demand looks set to wane over the next few years despite rampant growth in several energy transition uses, particularly electric vehicles. It’s unlikely we’ll see a continuation of the pace set in 2021, when demand has been supercharged by economic stimuli, pent-up lockdown demand and restocking along the value chain.
Will a slowdown mean the supercycle has paused? That could actually be a welcome respite for producers, who need more time to mobilise resources and ensure enough supply for the energy transition to progress. Or will energy transition uses more than offset the slowdown in more mundane applications and keep the supercycle dream alive?
The energy transition makes a supercycle almost inevitable
It seems there is little debate now around whether the energy transition, particularly an accelerated energy transition scenario, will lead to a supercycle for commodities.
I believe that if the world pursues a 2 °C decarbonisation pathway (our Accelerated Energy Transition 2-degree or ‘AET2’ scenario) a supercycle will exist across a broad spectrum of mined commodities. The exceptions will be coal, which will see a drastic drop in demand, and iron ore.
However, as I highlighted in a recent article – Is the end of coal in sight? – the sticks and carrots are not aligned. Neither the policy drivers nor the societal support currently exist to deliver a 2 °C pathway.
The term supercycle is used rather loosely, so it’s worth defining. A supercycle is a permanent step change in demand that cannot be met by supply, leading to prices sitting above incentive levels for an extended period. This last element is important, since it differentiates a supercycle from short term supply chain challenges or demand surges (which have the same impact on price levels). These characteristics arguably exist today, hence the talk of a new supercycle.
What does supercycle demand growth for mined commodities look like?
It’s also worth revisiting what happened to demand during the last supercycle for mined commodities. I’m not keen on using percentage growth rates to singularly define mined commodities. That’s because I think it misses the important point that mining is a tonnage-driven industry. However, given current talk of a supercycle, it’s useful to compare current projected rates with those of the last supercycle in 2003-2007.
As you can see, with the two notable exceptions of nickel and cobalt, mined commodities look set to experience slower average growth over the next five years than during the five peak years of the last supercycle. That should give pause for thought.
Nickel and cobalt will undoubtedly be beneficiaries of the exploding demand for batteries. However, it’s worth noting that stainless steel will remain the major driver for nickel consumption until at least the end of the decade. In contrast, lithium growth rates will be lower over the next five years compared with 2003-2007 – although obviously the lithium market was six times smaller then than it is today. Demand for traditional base metals will also be growing more slowly, while the declines in percentage growth rates for bulk commodities will be stark even under our base case Energy Transition Outlook (ETO).
However, perhaps on the basis of percentage growth rates it can be argued that for nickel, cobalt and lithium at least, the supercycle has started?
Absolute growth: the litmus test for a supercycle
To me, the litmus test for a mined commodities supercycle is absolute growth in demand.
Analysis of the data highlights the impact of the scale effect on absolute demand. Over the next five years, aluminium, copper, nickel, lithium and cobalt will all experience greater absolute growth than was seen during the last supercycle. For lead, zinc and metallurgical coal absolute growth will be broadly similar. Meanwhile, unsurprisingly, absolute growth in demand for iron ore, steel and thermal coal will decline markedly as the effects of even a slow energy transition start to bite.
Supply and prices: a drag on any potential supercycle?
So, one could argue that a new supercycle has started for several mined commodities, on the basis that absolute demand for them is accelerating beyond levels in the last supercycle. However, it’s important to remember there are two additional elements in the equation: supply and prices.
As I noted in a recent article, mined commodities are trending to surplus over the next few years. Prices look set to decline, so perhaps in answering the supercycle question ‘are we there yet?’ I would defer to the American author Michael Mandelbaum. As he said: “After all, the past is our only real guide to the future, and historical analogies are instruments for distilling and organizing the past and converting it to a map by which we can navigate.”
In other words, we only really know if we’ve experienced a supercycle when we look back through the lens of history.
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