Commodities in super cycle

Context:

An across-the-board rise in global commodity prices is leading to input cost pressures and is a growing concern, as it is not only expected to have a bearing on cost of infrastructure development in India but also have an impact on the overall inflation, economic recovery and policy making.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Mobilization of Resources)

Dimensions of the Article:

1. What is a Commodity super cycle?
2. “Commodity supercycle” in the past
3. Current Situation

What is a Commodity super cycle?

• Commodity super cycles are decade-long periods in which commodities trade above their long-term price trend.
• Some market analysts are seeing signs that a new super cycle is beginning in 2021 pointing to a weakening dollar and supportive central banks and fiscal stimulus geared towards infrastructure spending as well as renewable energy.
• To define: A commodity super cycle is a sustained period of abnormally strong demand growth that producers struggle to match, sparking an increase in prices that can last years or in some cases a decade or more.

“Commodity supercycle” in the past

• 2000 – BRIC: Brazil, Russia, India, and China represented 2.6 billion people in 2000, or about 40% of world population. The idea was that the BRIC countries were on a path of rapid industrialization, which would require an unprecedented amount of raw materials, food and energy commodities.
• The cycle continued for more than 10 years, starting around the turn of the millennium and lasting well into the 2010s.
• The commodities boom began showing signs of slowing when the great financial crisis and the subsequent Euro crisis roiled markets in 2008 and 2011.
• It finally came to a halt when the Chinese economy cooled off in 2015.
• The last supercycle was supported by a steadily eroding U.S. dollar. The currency had been on a depreciating path since the bursting of the dot-com bubble in 2001.
• It touched record low levels just as oil prices hit all-time highs in the summer of 2008. Since then, the U.S. dollar had been appreciating until the onset of Covid-19 in March 2020.

Current Situation

• Steel, the most commonly used input in the construction sector and industries, is at all-time highs, as most metals including base and precious metals prices have increased a lot in the last one year.
• Sugar, corn, coffee, soybean oil, palm oil — have risen sharply in the US commodities market, the effect of which is being seen in the domestic market, too.
• This current scenario of the start of a “Commodity Supercycle” is leading to input cost pressures and is a growing concern, as it is not only expected to have a bearing on cost of infrastructure development in India but also have an impact on the overall inflation, economic recovery and policy making. Higher metal prices will lead to higher Wholesale Price Index (WPI) inflation and so the core inflation may not come down.

To summarize, the new commodity super cycle is resulting from:

1. Recovery in global demand (led by recovery in China and the US)
2. Supply-side constraints
3. Loose monetary policy of global central banks (A monetary policy that lowers interest rates and stimulates borrowing is an expansionary monetary policy or loose monetary policy)
4. Investment in Asset Creation as a result of expectation of increase in inflation

-Source: Financial Express