Australia appears to be in the midst of another commodities supercycle, the likes of which was last seen during the China-driven boom in 2010-12. Prices for iron ore are at record levels, while other minerals have rebounded dramatically from their pandemic lows. The price of Copper is back at 2011 levels. Agricultural commodities such as wheat, corn, other grains, and soy are also experiencing a boom with prices at six-year highs.
The strength of the price recovery raises the question of whether there has been a structural change in commodity prices or something more cyclical. Commodity prices dived last year due to the pandemic, which severely disrupted production and supply chains. Some commodities are still recovering from dislocations to labour, transport, and demand. Prior to the pandemic, commodity markets were distorted by international trade tensions, most particularly the trade war between the US and China.
In the short term, some of the demand appears to be coming from the shift to greener economies – where supply of minerals such as copper have been constrained by the absence of large new reserves. A weakening US dollar might also play a role in the commodity cycle. With China now winding back its response to the pandemic and restarting the deleveraging program that the pandemic interrupted, its economic growth is likely to moderate sharply and therefore its pandemic related demand for commodities will also decline.
In the medium to long term, stimulus packages injected into economies all around the world will catalyze a spending spree on natural resources to meet the demands of new infrastructure projects. In the US alone, the Biden infrastructure plan would see $US2.3 trillion invested into America’s physical and social infrastructure, producing an enormous source of demand for commodities. Thus, there appears to be strong structural tailwinds in the commodities industry, which would greatly benefit Australia (where 2/3rds of exports are commodities).