In the wake of the COVID-19 pandemic, the global economy has been in a state of flux. Among the market sectors experiencing significant shifts, commodities have shown signs that might suggest we are entering a new supercycle. But what is a commodity supercycle, and what does it imply for the global market and, specifically, the Canadian economy?
Commodity supercycle defined
The term “commodity supercycle” refers to a multi-year, often decade-long period during which commodities’ prices remain significantly above or below their long-run trends. The main triggers of these supercycles are rapid industrialization and urbanization processes that lead to heightened demand for commodities. This strong demand, coupled with a lag in the supply response, results in a significant imbalance between demand and supply, pushing up commodity prices.
The reason for this persistent mismatch lies in the nature of the commodities industry itself. Investments by commodity producers to boost output often take a considerable amount of time to materialize, ranging from several years to a decade, as in the case of developing an oil and gas field. Consequently, the supply remains constrained and continues to lag behind the surging demand, leading to a sustained rally in commodity prices. This long-lasting, significant rise in commodity prices is what is referred to as a supercycle.
In the past century and a half, there have been four recorded instances of commodity supercycles, each aligning with periods of global rapid industrialization. The first was triggered in the late 1800s by U.S. industrialization and the burgeoning use of oil in manufacturing, shipping, and automobiles. The second supercycle started in the 1930s, spurred by worldwide rearmament in the lead-up to the Second World War. The third occurred in the 1960s, catalyzed by the reindustrialization of Europe and Japan. The most recent supercycle kicked off in the late 1990s, driven by China’s industrialization and its accession to the World Trade Organization in 2001.
During a supercycle, the demand typically concentrates around two categories of commodities. The first is industrial metals, including iron ore, used in making steel for various applications; copper, essential in building construction and the manufacture of industrial machinery and electronic products; and aluminum, utilized in a variety of applications from power lines to consumer electronics. The second category is energy, encompassing natural gas, crude oil, and coal, which are all indispensable for a wide array of uses, from cooking and heating to electricity generation, transportation, and industrial manufacturing.
Overall, a commodity supercycle significantly impacts global economic landscapes, creating booms in certain sectors and regions that are major commodity producers, while posing inflationary pressures and supply challenges for others.
Are we in a supercycle?
Today, we observe conditions hinting at the dawn of a new supercycle. A crucial indicator is the global population hitting the 8 billion mark in November 2022, a milestone that could significantly impact commodity markets. Additionally, per-capita consumption of commodities remains low in emerging economies, particularly in India, suggesting room for considerable growth.
Other factors supporting a potential supercycle include the global shift toward renewable energy, creating robust demand for battery metals like lithium carbonate, and the development of hydrogen and carbon markets. On the flip side, a resurgence of traditional energy sources could also instigate a supercycle as markets re-invest in these fuel types.
These projections are not unfounded, with Goldman Sachs, a significant proponent of the supercycle narrative, predicting in October 2020 that commodities were entering a supercycle that could last years, perhaps even a decade. Behind the bank’s supercycle call was the brutal decade for commodities in the aftermath of the 2008 financial crisis. By 2020, investors had all but abandoned the asset class in favor of equities.
Goldman’s global head of commodities research, Jeff Currie, recently reiterated this stance at the Financial Times Commodities Global Summit in March 2023. He highlighted the capital flight from energy markets and investment due to concerns in the banking sector, stating that such scarring events usually take months for capital recovery.
The Bank of Canada research indicates that there have been four broad-based commodity price supercycles since the early 1900s, the current one supposedly beginning in the mid-1990s. Now, it’s believed we are in its downswing phase. The development of these supercycles is often attributed to large, unexpected demand shocks combined with slow-moving supply responses. In the present context, rapid growth in China and other emerging-market economies are viewed as potential drivers.
Commodity outlook 2023
According to the Economist Intelligence Unit (EIU), 2023 is projected to witness a receding trend in most commodity prices, notably soft commodities. This is largely due to a slowdown in global demand. However, only a limited increase in supply means that prices will still remain high. The surge seen in prices of energy commodities, base metals, and several agricultural commodities in 2021, and then again in 2022 following the onset of the war in Ukraine, are not expected to fuel global inflation as they did in the previous years. However, there are increasing upside risks to these forecasts primarily tied to China’s economic dynamics, climate change, and the persistent conflict in Ukraine.
In the agricultural commodities market, the war in Ukraine will continue to have significant impacts in 2023. A decline in global supply chain disruptions stemming from the COVID-19 pandemic, coupled with increased production volumes of agricultural commodities, is projected to lead to a 9% drop in food, feedstuffs, and beverage prices. However, grain prices and the prices of oilseeds and vegetable oils, which are set to reach their lowest level by the end of 2023, will continue to be influenced by developments in the Black Sea region due to the war.
In terms of base metal prices, despite not reaching the peak levels of 2022, they are expected to edge upwards throughout 2023. This is largely attributed to policy-driven decisions to bolster construction and manufacturing in China, and rising demand for Asian production, given the energy crunch in Europe. Average prices for base metals in 2023 are projected to be lower by 11% compared to the average for 2022.
As for energy commodities, EIU expects that oil prices will average more than US$85 per barrel in 2023, even though average prices for all hydrocarbons (excluding LNG) are anticipated to register double-digit declines. Continued conflict in Ukraine, climate change impacts, and China’s economic reopening after COVID-19 are expected to remain significant wild cards for the commodity markets in 2023. These factors can significantly influence the performance of commodities such as cotton, coal, and gas.
Climate change, in particular, is expected to play a major role in commodity markets, given the increasing frequency of extreme weather events. These weather patterns are likely to affect agricultural commodities like wheat, maize, soybean, sugar, and coffee. Furthermore, they can also influence the energy markets, as seen in Europe where the heatwave led to a spike in gas and electricity prices due to increased demand. Weather conditions, alongside the lingering effects of the war in Ukraine and the potential for rapid economic reopening in China, pose considerable uncertainty to the outlook for commodities in 2023.
Despite EIU’s predictions, WT Crude Oil now sits at $63.64 a barrel, slightly up on its 52-week range but nowhere near the $85 a barrel unless something changes drastically before the end of the year. Other hydrocarbons also remain positive over the last year and aren’t in double-digit declines. Gold, silver, platinum and copper sit at 50% up or better on their 52-week range with gold coming in at $1953 per ounce, silver at $23.63 per ounce, platinum at $996 per ounce and copper at $3.82 per pound.
Also, meat and livestock are living high on the hog for their 52-week period while agriculture products swim at the bottom of their 52-week cycle. Will the agricultural supply drop translate to higher prices in the future, helping to feed the beginning of another super cycle?
The promise of abundant returns, supercycles also present risks. The recent decline in global commodity prices, for instance, led to a decrease in Canadians’ income and wealth, triggering a complex and costly adjustment in the country’s economy. This vulnerability underscores the importance of being prepared for shifting price cycles.
According to John LaForge, head of real asset strategy, and Mason Mendez, investment strategy analyst, commodities are like black holes, with the gravitational pull of a supercycle being difficult for any individual commodity to escape. If their analysis is accurate, a commodity bull market might be in its nascent stages. They posit that technical indicators suggest that a new supercycle likely began in 2020, a view corroborated by Goldman Sachs.
Players in the commodity space
NioCorp Developments (NB.T), a firm focused on developing critical mineral projects, is well-positioned to potentially reap the benefits of a commodities supercycle. Its major project in southeast Nebraska is set to produce a range of commodities, including niobium, scandium, titanium, and potentially, several rare earths. These materials are all crucial components in various high-demand applications.
Niobium is a vital element used in the production of specialty alloys and high-strength, low-alloy (HSLA) steel, offering superior strength and lightness, making it essential for automotive, structural, and pipeline applications. Scandium, another specialty metal, when combined with aluminum, enhances its strength and corrosion resistance, and plays a crucial role in advanced solid oxide fuel cells. Titanium, known for its strength and light weight, is used in numerous applications ranging from aerospace to medical implants, and also in pigments used in paper, paint, and plastics.
Furthermore, NioCorp is exploring the potential to produce rare earths such as neodymium, praseodymium, terbium, and dysprosium, integral to the production of neodymium-iron-boron (NdFeB) magnets. These magnets are utilized across a broad array of defense and civilian applications. With the rise of green energy and electric vehicles, demand for these magnets, and hence these rare earths, is expected to surge.
The company’s planned Elk Creek critical minerals project, located in southeast Nebraska, represents a significant milestone. As of early 2023, NioCorp has applied to the Export-Import Bank of the United States (Exim) for debt financing to cover project costs under Exim’s “Make More in America” initiative. While the process, subject to due diligence, negotiation of final terms, and definitive documentation, may take up to six to nine months, it marks a critical step in advancing the project.
However, it should be noted that there remain risks and uncertainties regarding the completion of the debt financing. There is no guarantee that the financing will be finalized on the discussed terms or at all. Nevertheless, if successful, this financing would bring NioCorp closer to production, positioning it to benefit from a potential commodities supercycle.
West High Yield Resources Ltd. (WHY.V), a Canadian junior miner operating the Record Ridge Industrial Mineral Mine Magnesium Project (“RRIMM”) Project, could greatly benefit from a potential commodities supercycle. In the first quarter of 2023, the company achieved significant milestones in both project development and regulatory compliance.
Key developments for the RRIMM Project included the submission of an Amended Application to the Ministry, containing important supplementary information. The company has successfully completed all necessary geotechnical fieldwork requested by the Ministry and submitted crucial mine site engineering designs and reports, indicating its readiness to proceed with the project upon regulatory approval.
Technological progress has also been significant, particularly in magnesium hydrometallurgical testing. WHY Resources has worked closely with reputed companies like KPM, KON Chemical Solutions, Tenova, and Bumigeme Inc., to conduct in-depth testing and feasibility studies for magnesium extraction. The tests confirmed the chemistry and process conditions needed to produce high-purity MgO and other valuable by-products. This led to the creation of a preliminary commercial scale flowsheet and a balance of mass and energy, hinting at the possible creation of a commercial plant capable of treating 60,000 t/y ore. A Pre-Feasibility Study (PFS) concluded in November 2022 revealed promising project economics, with an estimated annual average production of 86,500 tonnes of 98% purity MgO product.
Meanwhile, West High Yield Resources made substantial strides in the Midnight Gold Claim project, located in the Rossland Gold Camp, historically known for its gold productivity. Preliminary assay results from drilling operations launched in April 2022 have shown positive gold yields, which bolsters the company’s multi-commodity potential.
Strategic partnerships have also been established, including a non-binding Memorandum of Understanding (MOU) with Big Blue Technologies LLC. This collaboration sets the stage for the construction of an Mg processing facility in Canada, with expansion potential across North and Central America, as well as South America.
On the financial front, WHY Resources successfully raised $2,500,000 CAD in a flow-through private placement offering in December 2021 and an additional $197,003 from a brokered private placement offering in January 2023. Furthermore, the company recently closed a sixth tranche under the drawdown equity financing facility with Alumina Partners, issuing one million units at a price of $0.36 per unit.
The funds raised from these financial maneuvers will be invested in the company’s prefeasibility study Stage 3, which includes the detailed design and economic evaluation of a semi-commercial demonstration plant, and preparations for mining magnesium ore at its Record Ridge deposit in 2023.
With notable progress in regulatory compliance, technological innovation, promising project economics, and strategic partnerships, West High Yield Resources Ltd. appears well-poised to take advantage of a potential commodities supercycle. The company eagerly awaits the Ministry’s permit to expedite mine site development and commence mining operations.
Conclusion
While the idea of a new commodity supercycle is compelling, it’s essential to remember that predicting such vast, macroeconomic trends is fraught with uncertainty. Economic conditions, market behaviors, and government policies can all exert significant influence, creating unpredictable outcomes. Regardless, the possibility of a commodities supercycle should not be disregarded and warrants careful monitoring and analysis by investors, policymakers, and businesses alike.
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