Are ASX 200 mining shares at the start of another supercycle? This is the question on the minds of many investors as commodity prices have skyrocketed in response to the pandemic.
While it's difficult to say for certain, there are a number of factors indicating that this could be the case. Some analysts are already comfortably labelling the coming decade as the fifth supercycle in history for resources.
Let's take a closer look at what defines a supercycle and whether or not ASX mining shares are poised for more growth.
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What is a commodity supercycle?
Before we get ahead of ourselves, let's understand what characterises a commodity supercycle.
A commodity supercycle is a prolonged period of time where commodity prices experience significant increases. This is driven by a structural shift in the supply and demand dynamics, which plays out across a number of years.
Across the span of 150 years, four supercycles have taken place. All of these were a result of a seismic change in demand following an evolution in how and what we use materials for.
In history, supercycles have occurred during periods such as the industrial revolution. This saw a step change from large-scale production of goods to mass production (think Henry Ford).
Prices of the desired commodities push higher to spur on an increase in supply, leading to the expansion of mining operations.
The mining companies that manage to provide supply into these booming periods are often handsomely rewarded. As an example, ASX 200 constituent, BHP Group Ltd (ASX: BHP) posted an annual profit of A$22.46 billion in 2011 — this was during the last mining boom.
Prior to FY21, the best the mining giant could muster up since 2011 was A$15.1 million in net profit after tax in 2012.
Are ASX 200 mining shares set for another boom?
Now that we have an understanding of what is involved in a supercycle, are we staring at the beginning of the next one? Based on the insights from analysts, it seems there's a chance we very well could be.
Last month, analysts at Goldman Sachs shared their belief in a new long-term bull market for commodities. In fact, head of global commodity research, Jeffrey Currie said, "[…] there has rarely been a better time to add commodities to a portfolio […]"
Furthermore, the decarbonisation trend has been highlighted by experts as a potential heavy lifter in demand for materials.
While Janus Henderson Group (ASX: JHG) portfolio manager, Tim Gerrard, prefers to steer away from calling it a 'supercycle', he does see a structural shift playing out from environmental pressures.
Sharing his comments in an interview with Livewire, Gerrard said:
Demand for materials to make the world a better place to live is driving change globally. Whether it is satisfying the need to decarbonise by electrification, replacing plastics with paper products that are renewable and biodegradable or developing more sustainable animal nutrition – the need for resources is very diverse and growing rapidly.
Demand has already been out of balance with supply for many commodities since the beginning of 2020. As shown in the chart above, prices for the likes of lithium, aluminium, and nickel have skyrocketed in response.
What's the verdict?
If the trend continues, ASX 200 mining shares could be set for a massive windfall over the years to come. Despite this possibility, the performance of these companies has been patchy over the last year.
- BHP Group – down 1.7%
- Fortescue Metals Group Limited (ASX: FMG) – down 20.6%
- Mineral Resources Limited (ASX: MIN) – up 23.4%
- Pilbara Minerals Ltd (ASX: PLS) – up 173.6%
This suggests, supercycle or no supercycle, selecting the right ASX 200 mining shares will be paramount to investor success.
