Oonly a few Years ago, analysts and investors talked about a new “super cycle” in commodities. Some believed that the world was about to experience a repeat of the commodity price boom that began in the early 2000s and lasted until the global financial crisis of 2007-2009. This time, the trigger was intended to be a mix of a rapid economic recovery as the West emerged from Covid-19 lockdowns, combined with a shift to green energy.
Today the statement seems much less certain. Prices of lithium and nickel, which are vital for electric vehicles (EV) batteries, exploded in 2021 and 2022, but have since collapsed. Nickel is almost 50% cheaper than at the beginning of 2023. Lithium’s decline has been even steeper, with its price falling by more than 80% over the same period. The Bloomberg Commodity Index, made up of a basket of foods, fuels and metals, has fallen 29% since peaking in mid-2022.
Oil demand forecasts now also vary wildly depending on assumptions about governments’ plans to wean consumers off the stuff. The International Energy Agency expects oil demand to increase to 106 million barrels per day (bpd) by 2028, up from 102 barrels per day last year, and global demand will not peak much above that level. The Organization of the Petroleum Exporting Countries, a cartel of oil producers, expects demand to rise more than twice as fast over the next five years, to 110 million barrels per day, and then continue to rise over the next 20 years.
Trading commodities has never been easier: prices depend on unpredictable economic cycles, but also on the production capacity of drillers, growers and miners. But it’s a nightmare now. On top of such concerns, investors must contend with a barrage of political and technological uncertainties, ranging from developments in battery technology to government demands for subsidies. And it is these questions that will determine the pace of the green transition.
Start with the EV market. It’s clearly still growing: 14m EVIn 2023, s were sold worldwide, an increase of 35% compared to the previous year. But how fast will it continue to grow? Both new and used EVThey have been in US dealerships longer than their petrol rivals. This was reported by Volkswagen, a German car manufacturer EVIn 2023 they will account for 8 to 10% of turnover, compared to 11% the year before. Ford and GM are among the automakers experiencing delays EV– and the construction of battery factories in the past year. Wariness about the sector is hurting the share price of Tesla, the market leader, which is down 26% this year. And wants evDo you still need the same battery materials? New sodium-ion batteries require neither nickel nor lithium. As they begin to replace existing grades, demand for these metals will plummet.
Political considerations are also becoming increasingly difficult to follow, because the direction of travel is no longer one-way. Politicians in the rich world have become concerned about the costs associated with the energy transition. In September, Britain postponed a ban on internal combustion engines. Ahead of the European Parliament elections in June, the centre-right European People’s Party’s draft manifesto now opposes an outright ban on such engines. Are these just cosmetic changes or the beginning of a deeper shift in green policy? Commodity investors need an answer.
Nor is it just Western policies and demands that matter. During the last commodity supercycle, China’s construction of millions of apartment buildings, hundreds of thousands of kilometers of roads, and all kinds of other physical infrastructure caused demand for hard commodities to grow rapidly. Now demand from the world’s second largest economy is much less certain. China’s economic growth has slowed significantly and real estate investment has fallen, as the government tries to steadily deflate a bubble of its own creation. At the same time, copper prices have proven surprisingly resilient, falling just 9% over the past twelve months. This reflects China’s pursuit of energy self-sufficiency, including solar energy and hydropower.
Pity anyone whose job it is to predict how these factors will play out over the next twelve months: if it’s difficult to get an accurate picture of the tradeoffs in Western politics, it’s almost impossible to approach to predict an increasingly private Chinese government. It is clear that old methods of reading commodity markets are no longer sufficient. Without an understanding of the demand for new vehicles, the technology therein, and the politics of net zero, any bets on the future of commodity markets will be little more than guesswork. ■
Read more from Buttonwood, our financial markets columnist:
The dividend is back. Is it right that investors are satisfied? (February 8th)
Bitcoin ETFs are off to a bad start. Will things improve? (February 1)
Investors May Be Getting the Federal Reserve Wrong Again (Jan. 24)
Also: how the Buttonwood column got its name