Potential Commodity Super Cycle Ahead Amidst Soaring Raw Material Prices
The global demand for raw materials essential for the energy transition and climate change initiatives has surged, yet the extraction rates are declining due to the unprofitability of new mining projects. This dynamic is creating a significant investment opportunity in commodities as prices have notably increased across the board.
In a remarkable two-month span, the price of silver on international exchanges has escalated by 29%. Similarly, other key industrial metals like palladium and zinc have seen a 24% increase, with gold up by 20%, and copper by 18%. Prices for aluminum, platinum, and nickel have each risen by 15%. Citibank has informed its investors that further "price explosions" are plausible over the next three years, contingent on a global economic rebound that would spike commodity demands. However, even under current moderate economic growth, Citibank forecasts a continuous rise in prices until at least 2026.
This escalating demand correlates with mega-transformational projects like the energy transition which requires substantial construction activity. Yet, the mining industry is struggling to keep pace due to reduced capacities over the past two decades, exemplified by the dwindling number of aluminum smelters in the USA and other global smelters operating at full capacity.
The challenge intensifies when considering the rarity of new mining projects. For instance, the global demand for copper is expected to increase by six to eight million tons per year by 2030, but production from the ten largest copper mines might only increase by about one million tons. Establishing new mines is a lengthy, often decade-spanning process requiring substantial capital investment, with estimated global investment needs for copper alone reaching $150 to $250 billion by 2030.
The hesitancy of many institutional investors to engage with the mining and metal processing sector—often viewed as environmentally unfriendly and socially problematic—has exacerbated the funding shortfall. However, this presents a paradox where the rising prices due to supply shortages could initiate a new super cycle in commodities.
Experts like Poonam Tandon, Chief Investment Officer at IndiaFirst, suggest we might be on the brink of such a super cycle, potentially spurred by major industrialization efforts in countries like India, similar to what was observed with China in the 1990s.
Investors might find lucrative opportunities through exchange-traded funds (ETFs) that track the commodities market, including specific segments like copper or aluminum. Shares of major mining companies such as ArcelorMittal, Glencore, and Rio Tinto have also seen recent appreciations in value, reflecting the upward trend in commodity prices, though they have underperformed in comparison to broader indices like the DAX year-to-date.
