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Source: Stephen Codrington
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COMMODITY SUPER-CYCLE AHEAD?
8 April 2021
Mineral prices have increased strongly over the past year. Will this continue? Yes, say investment banks, Goldman Sachs and JP Morgan, both forecasting a commodity super-cycle (entailing a sustained rise in commodity prices) in coming years. In our view, this optimism should be treated with caution.
First, even if demand for commodities (e.g. copper, nickel, cobalt, lithium, iron ore) increases strongly, prices will not necessarily follow – this depends on supply responses.
This phenomenon was recently illustrated in the case of lithium, for which prices were booming in 2016 and 2017. However, in 2018 and 2019, world lithium mine production (driven by Australia) doubled. Prices between late 2017 and late 2020 slumped as a result.
Second, optimism about commodity prices is partly based on the assumption of continuing strong growth in electric-vehicle sales. This assumption was supported by sales in 2020, which increased by around 40%, dominated by Europe and China. Consultancy company, Deloitte, and others see electric-vehicle sales as a proportion of all vehicle sales increasing from 5% in 2020 to at least one-third by 2030.
However, for this to happen, sales will need to increase strongly in other advanced economies, notably the United States and Japan, which are still relatively small markets and where subsidies are much less than in Europe and China. In this context, 2020 provided no encouragement: sales grew only marginally in the United States and declined in Japan.
Will this change? Speaking at a Canadian mining conference in March, one economist expressed the view that that a commodities super-cycle is possible if “world governments follow through on plans to spend big sums on green economic stimulus”, but that “a lot needs to be said and done in order to see that spending put on the table” (Jumana Saleheen, Chief Economist of CRU, a London-based commodities analyst).
These points are particularly relevant to copper, a key industrial commodity and used much more intensively in electric vehicles than in conventional vehicles. Goldman Sachs sees a copper-price boom ahead. However, the Office of the Chief Economist in Canberra and commodities analyst Fitch both see annual growth in global copper production of 2-3% in coming years, enough to dampen such a boom.