Is the world entering a commodities supercycle?

Prices of many commodities have sharply increased since the start of the Covid-19 pandemic in early 2020 despite the economic impact caused by the pandemic. The situation has sparked an unsettled debate about how marked and long-term these price rises are likely to go on and how they will affect producer and consumer behaviour.

There are three possible interrelated explanations for what is taking place and for what may emerge in the coming years:

• This could be the start of a new traditional commodity cycle. A lack of investment during a decade of low prices is now resulting in higher prices. This pattern is set against a continued backdrop of rapid increases in demand for certain commodities, including those most closely linked to deforestation such as soy, palm oil and beef.
• This could also be a temporary supply shock driven by disruptions associated with the Covid-19 pandemic combined with increased demand from the economic bounceback that is further reinforced by rising inflation.
• This could be the beginning of a genuinely new commodity supercycle. It could be the start of a commodity cycle reinforced by the effect of supply chain disruptions from the pandemic and a transition towards a greener economy. If this is the case, price hikes can be driven by increased demand for commodities, such as the many metals essential to electrification and renewable energy sources that are critical to the transition, and the growing importance of sustainability considerations, which lead to higher standards. Both of these can lead to “greenflation”,  or higher costs that are passed onto consumers.

The jury is very much still out on whether we are entering a commodity supercycle. Investments in any transition to a low-carbon economy are still in their infancy. Certain projections suggest that prices will stabilize or fall in the latter part of 2022. It is hard to conceive that the midterm prices for energy and many metals will be anything other than significantly higher – especially given the critical dependence of electrification on currently scarce commodities. For example, consumption of copper – which is fundamental to any transition towards a more electrified commodity – is expected to more than double by 2050.

Regardless of the underlying causes of these trends, social and environmental impacts are already surfacing. Record highs in gas prices over the last year strongly affected the price of all other commodities, especially fertilizers that are the bedrock of modern agriculture. Serious warnings are already emerging about the likely effects for 2022 harvests from the rising costs of fertilizer, with some countries banning exports of fertilizer and even ammonia exports.

The situation has serious ramifications for the deforestation agenda, one of the cornerstones of the Glasgow climate agreement. The surge in prices of major agricultural commodities remains the elephant in the room when it comes to trying to deliver on net-zero targets in line with 1.5°C of global heating. Despite renewed pledges from governments in both producer and consumer economies to curb deforestation, the surge in prices and demand means one of two things. Either agriculture will continue to expand into native vegetation despite the best efforts of producer governments, a marked shift of behaviour will need to take place in demand markets, whether through increased prices and favourable access to capital to incentivize higher standards (including deforestation-free production), reduced consumption, or both.

Our experience of the last few decades does not bode well for either. Regardless of how much commodity prices continue to rise, persistently high prices also pose grave threats to acute food security in many low-income countries, which have a high dependence on historically cheap food imports. When faced with the choice of paying more for imported food or shifting to clear more land for subsistence crops to feed a growing population, low-income countries will make the obvious decision.

The debate will continue on what is driving recent commodity price rises, and how long we can expect this trajectory to continue. Regardless, the implications for policy are the same. Policymakers must recognize and engage with the underlying economic trends that shape the global economy and transcend the jurisdiction and influence of individual countries. The price of agricultural and mining commodities is at the forefront among such trends. Unless we recognize and act on these trends, we cannot chart a course for delivering on sector-specific goals, the Glasgow Climate Pact or the 2030 Agenda for Sustainable Development.