Momentum Catalyst for the Commodity Supercycle unfolding

Eugene van den Berg, Oct 2021

In another post of the current commodity supercycle unfolding I made reference to commodity supercycles also being supported by accompanying dollar weakness.

What are we looking at and what are we observing:

• • The US Dollar (USD) as measured by the DXY Index vs. the Commodity Research Buro (CRB) Index
  • We compare the start of the commodity supercycle of 2002 to 2011, and more specifically, the behavior of USD weakness and commodity strength shortly after the onset of the supercycle, to the behavior today (far right) of the onset of the current commodity supercycle (that started in April 2020), and more specifically the behavior of USD weakness and commodity strength shortly after the onset of the supercycle;
  • The inverse relationship between USD weakness and commodity strengths was when the last commodity supercycle gained momentum around 2004. We are perhaps not there yet in the current cycle; and
  • The current USD weakness is less inversely correlated with the CRB index. The CRB Index performance at the start of the current commodity supercycle is much more aggressive in relation and is at a steeper inclination compared to the start of the commodity supercycle of 2002 to 2011.

Will the premise hold that a commodity supercycle is also partly driven by USD weakness? What is different this time around?:

• • When the commodity supercycle started in 2002 the world was:
    1. flush in oil to support increased manufacturing and shipping;
    2. Renewable Energy (RE) was mainly talked about with less strongly articulated RE policies; and
    3. China was the main driver of growth experiencing economic growth above ~10% constant double digits. China also became the “world’s factory”

• • The start of the current commodity cycle:
    1. lacks the benefit of sufficient investment in oil and gas;
    2. RE and energy transition is contributing to an energy crisis;
    3. Vast under investment in oil and gas since 2015 driven by climate activism
    4. China’s economy is showing signs of slow growth;
    5. RE and Electronic Vehicle legislated start dates (dates that Internal Combustion Engines end to be sold in countries) driven the energy transition to green with a specific demand for core commodities (lithium, cobalt, copper) and component parts that are required for the manufacturing of microchips. Microchips are experiencing severe supply chain challenges not expected to be resolved before 2023. What does that do to pivoting to selling more EV’s?;
    6. RE core commodities experiencing demand that exceeds supply; and
    7. Covid19 that contributes to labor shortages and shipping backlogs

I believe the fact that many nations, including the USA, which is also the world’s reserve currency nation, are focused on RE development and energy transition, could see the inverse correlation panning out differently from what we observe from previous commodities supercycles. Would this suggest that the impact on inflation for many nations could be more severe, rising commodity prices combined with relatively less weak USD performance?