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Supercycle

A prolonged period of strong economic growth

What is a Supercycle?

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.

 

Summary

  • 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.

 

Real-World Examples

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.
  • The fourth supercycle started in the late 1990s, with China’s industrialization and membership in the World Trade Organization (WTO) in 2001.

 

Types of Commodities in Demand During a Supercycle

In a supercycle, there tends to be outsized demand for two specific types of commodities:

  1. 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.
  2. Copper: Used in building construction, the production of industrial machinery, electronic product manufacturing, etc.
  3. Aluminum: Used in power lines, window frames, aircraft, industrial appliances, consumer electronics, etc.
  4. Energy, which includes:
    • Natural Gas: Used for cooking, heating, electricity generation, as a chemical feedstock in the manufacture of plastics, etc.
  5. Crude Oil: Used for heating, transportation, electricity generation, petroleum products, plastics, etc.
  6. 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.

Such a view is outlined by Goldman Sachs, which sees 2022 as the start of a metals supercycle that will last for decades. With that said, Goldman’s view is not seen as a consensus, as some other analysts cite a cyclical upswing in commodities rather than a new supercycle.

 

Additional Resources

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Market Economy
  • Economic Growth Rate
  • Monetary Policy
  • Sustainable Growth Rate
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