A supercycle is a prolonged period of strong economic growth, leading to sustained demand for commodities beyond what producers can supply. Supercycles can last years.
A supercycle is a period of strong economic growth, leading to sustained demand for commodities.
Four supercycles were recorded in the past 150 years, primarily due to the rapid industrialization of the global economy.
As supercycles give rise to increasing commodity prices, they can result in higher inflation.
Understanding a Supercycle
There are different types of economic catalysts that can trigger a supercycle, with the key theme behind each catalyst being rapid industrialization and/or rapid urbanization. Such economic catalysts can cause strong demand for commodities, resulting in a significant mismatch in near-term demand and supply. The mismatch leads to (1) a rise in commodity prices and (2) investments by commodity producers to increase output.
However, it can take numerous years for the investments by commodity producers to be completed (e.g., the development of an oil and gas field may take up to a decade). As a result of the constrained supply, demand for commodities may continue to outstrip supply for a prolonged period of time, sparking a rally in commodity prices that can last years – which is called a supercycle.
In the past 150 years, four supercycles were recorded, with each one roughly coinciding with periods of rapid industrialization in the global economy:
The first supercycle started in the late 1800s, fueled by U.S. industrialization and the use of oil in manufacturing, shipping, and automobiles.
The second supercycle started in the 1930s, driven by global rearmament prior to the Second World War.
The third supercycle started in the 1960s, driven by the reindustrialization of Europe and Japan.
Types of Commodities in Demand During a Supercycle
In a supercycle, there tends to be outsized demand for two specific types of commodities:
Industrial Metals, which include:
Iron Ore: Used in the production of iron, which is used to make steel. Steel is used in automobiles, ships, furniture, bridges, buildings, etc.
Copper: Used in building construction, the production of industrial machinery, electronic product manufacturing, etc.
Aluminum: Used in power lines, window frames, aircraft, industrial appliances, consumer electronics, etc.
Energy, which includes:
Natural Gas: Used for cooking, heating, electricity generation, as a chemical feedstock in the manufacture of plastics, etc.
Crude Oil: Used for heating, transportation, electricity generation, petroleum products, plastics, etc.
Coal: Used for electricity generation, the manufacturing of steel and cement, etc.
Supercycles and Inflation
As we outlined, supercycles result in rising commodity prices. As commodities are used as an input in everyday life, they can raise the cost of goods and services, resulting in higher inflation. If inflation is not controlled, it may prompt central banks to adopt hawkish monetary policies to ease inflationary pressures, which, in turn, could adversely impact financial markets.
New Supercycle in 2022?
In 2021, with President Biden’s proposal for an overhaul of U.S. infrastructure, the global transition to renewable energy, and the expansion of data infrastructure, it is widely believed that we are entering into a new supercycle.
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.