What is a supercycle?
The term supercycle describes a sustained period of economic expansion and growth in a particular industry or market. A supercycle lasts significantly longer than a typical business cycle and is characterised by strong demand and high prices.
Various factors, such as technological innovations, population growth, and changes in global economic conditions, can drive supercycles. Due to the strong demand for raw inputs, supercycles are often associated with periods of high commodity prices and benefit investors via buoyant share prices.
The economy tends to be cyclical, moving between expansion and contraction phases. In a typical economic cycle, the economy will expand, peak, contract, and then reach a trough.
After this, it will expand again as a new cycle begins. Economic cycles vary in length, on average lasting about 5.5 years. A supercycle is different. It is a sustained period of solid demand which can last years or decades.
The rise of industrialisation, post-war rebuilding, and rapid advances in the economies of developing nations are examples of driving forces behind past supercycles.
The commodity supercycle of the early 2000s was a period of sustained growth in commodity prices that began in the late 1990s and lasted until around 2014.
Copper prices increased by more than 400% between 2003 and 2011, while oil prices rose from around $20 a barrel in the late 1990s to over $100 a barrel in 2011.
Although prices took a tumble during the 2007-2008 Global Financial Crisis (GFC), they had largely recovered by mid-2010. Suppliers struggled to meet the demand for raw materials during this supercycle, and concerns over the long-term availability of inputs also contributed to price rises.
This has led to significant growth and expansion in the sector, with US-based companies such as Apple Inc (NASDAQ: AAPL), Amazon.com Inc (NASDAQ: AMZN), and Microsoft Corp (NASDAQ: MSFT) becoming some of the most valuable in the world.
How are they triggered?
Typically, supercycles are triggered by periods of rapid industrialisation and urbanisation. This leads to robust demand for products and services, increasing demand for inputs such as raw and manufactured materials, metals, and plastic.
Factors such as a resurgence of economic growth (like that seen in the wake of the COVID-19 pandemic) and the impact of government stimulus can also spur demand. Global governments pumped billions into post-pandemic stimulus measures worldwide, amplifying demand for goods and services, which rebounded as the world emerged from pandemic restrictions.
The increased demand can exceed producers' abilities to supply materials, leading to shortages and price increases. This is positive news for commodity producers – as demand for raw materials increases, demand for resources such as iron ore, copper, and aluminium also ramps up.
Producers of these commodities benefit from resulting price spikes. Major ASX iron ore producers such as BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) reported record shipments in 2022 as the iron ore price sat 70% above the levels seen in 2020.
Global commodity prices, however, have moderated in 2023, falling 14% in the first quarter. By the end of March 2023, they were roughly 30% below their June 2022 peak. This reflected slowing economic activity as interest rate hikes began to bite.
Central banks globally began raising interest rates in 2022 as inflation spiked. Inflation in Australia reached a 30-year high in the December 2022 quarter. It eased slightly in early 2023 but was still around 7%.
What does a supercycle look like?
We can recognise a supercycle by the sustained rising demand for energy and raw and manufactured materials. Suppliers must ramp up production capacity to meet increased demand, but this can take time.
Some mines, for example, can take years to become operational, which leads to a more extended period of high commodity prices, benefitting producers.
Supercycles occur on an economy-wide basis but can also be driven by growth in specific sectors of the economy. A good example is lithium used in electric vehicles. Lithium prices surged 400% in the 12 months to June 2022.
What's in demand during a supercycle?
Supercycles increase the demand for energy and industrial metals used to drive the global economy. Widely used industrial metals include:
- Iron ore: used in making steel which is crucial to commercial construction
- Copper: essential to electrical equipment, industrial machinery, and construction
- Aluminium: used to manufacture goods as diverse as window frames, drink cans, and aeroplane parts.
During a supercycle, there is increased demand for energy to drive production. Commodities in demand include:
- Oil: petroleum products are used for everything from powering transport and machinery to manufacturing plastics
- Coal: used in electricity generation and is an important component in the manufacture of steel
- Gas: a fuel source for heating and cooking and generating electricity.
Supercycles can also occur in specific sectors of the economy where there is strong growth. This can drive booms for the materials used most commonly in these sectors. Examples of potential sector-specific supercycles include:
- Renewable energy development: A prolonged investment cycle is forecast for the renewable energy sector. Key inputs such as copper and steel used in solar panels and wind turbines are in high demand.
- Electric vehicle adoption: In the race to sustainability, electric vehicles are being adopted rapidly. This spurs demand for the metals used in their batteries, such as lithium, cobalt, and nickel.
- Data infrastructure expansion: An outsize investment cycle in data infrastructure is anticipated due to rampant data creation and pent-up demand. This will necessitate inputs such as copper and rare earth minerals.
Supercycles can also drive demand for precious metals such as gold and silver. This is not necessarily because of increased industrial consumption but because investors can use precious metals as an inflation hedge.
How do supercycles impact the share market?
Supercycles can significantly impact the share market. Companies that produce or sell commodities or products related to the supercycle experience strong growth in demand and earnings. This leads to increased investor interest in these companies and higher stock prices.
However, when a supercycle ends, it can lead to a significant decline in stock prices for companies heavily reliant on the supercycle for growth. For example, when the commodity supercycle came to an end in the mid-2010s, many commodity-related companies saw their stock prices fall sharply.
Could we be in a supercycle?
Some analysts predicted the start of a new supercycle in 2022, pointing to rising commodity prices and shortages in everything from building supplies to base metals. Increased demand was a factor, but supply chain pressures also contributed to an imbalance in demand and supply.
In 2023, rising interest rates and inflation have acted as headwinds on economic growth prospects.
Nonetheless, accelerating the global transition to lower carbon energy sources is expected to spur a new commodity supercycle. Supercycles result from a structural shift in supply and demand caused by a step-change in production or material use methods.
As advanced economies move away from industrialisation and towards digitalisation, materials demand could shift significantly. Strong demand for clean energy commodities and an inability to deliver them quickly could see sharp moves in commodity prices.
Whether this develops into a supercycle over the long term is yet to be seen.
If supply pressures ease, so may prices. On the other hand, long-term trends such as decarbonisation are likely to drive demand for certain commodities for some time yet.