New commodity supercycle may benefit Mongolia
There are rare occasions when economic circumstances align to drive global demand for commodities through the roof. When this happens, the resource sector can enter what is known as a ‘supercycle’ – a prolonged period of high prices and sustained growth.
Only four commodity supercycles have occurred in the last hundred years. The most recent was driven by Chinese economic growth and ran from 2000 until the financial crash in 2008/2009 (or 2013/2014, depending on how you look at it). Over those years Mongolia’s annual GDP growth ranged from 7 to 10 percent. Some made fortunes during that time.
A fifth supercycle could arrive as the world enters the final phases of the Covid-19 pandemic and starts to build massive clean energy infrastructure. If it does, Mongolia’s economy may enter a new period of strong and sustained expansion.
So how do we know if we’re in a supercycle?
First, commodity prices are rising almost exponentially: the price of copper has climbed around 80 percent over the last 12 months and iron ore has risen 85 percent in a matter of weeks. The rise of copper prices is particularly important because demand for the metal is seen as a weathervane for global economic growth - you can’t move electricity without copper.
These price rises can be seen as a sign that the global economy is now rebounding from the pandemic. Importantly for Mongolia, this is corroborated by other indicators showing increasing manufacturing and construction activity in China.
Second, policies designed to assist in post-pandemic economic recovery are likely to keep demand for commodities high. US investment bank Goldman Sachs has said that financial stimulus aimed at increasing wage growth for lower-income households – which tend to spend their extra money – will increase resource-heavy consumption and construction. In other words, people will buy more phones and more houses in the next few years.
“Those fiscal spigots aren’t suddenly going to get turned off – the [US Federal Reserve] and the European Central Bank have signalled their current settings will remain until there are signs of sustained inflation, which may be years away,” Stephen Bartholomeusz, a respected business columnist, said in a recent editorial.
Third, demand for commodities is likely to continue in the longer term thanks to a global shift to green energy. All those new wind turbines will need miles and miles of copper wires, but mining companies slashed investment during the post-2014 bust. It takes years to build new copper mines – think of the underground expansion at Oyu Tolgoi - meaning demand for metals could outstrip supply for years.
“The key ingredients for a new resources boom – a super-cycle – are present,” Bartholomeusz said. “A surge in demand appears likely in an environment where supply is expected to be constrained for at least some years.”
A dose of reality
Despite all the good signs, it can be difficult to tell whether a supercycle is actually here.
Sceptics of the positive forecast argue that recent commodity price rises are driven by China’s colossal effort to stay afloat during the pandemic, when it injected almost US$1 trillion into its economy and national infrastructure. Rising property prices in major cities compounded the recovery.
Neither of those conditions are permanent. As China’s pandemic-related stimulus winds down, so too could its demand for commodities. The China Iron and Steel Association has been cited as predicting a fall in iron ore demand when stimulus wears out and steel mills slow down. China accounts for 50-60 percent of global demand (according to some estimates).
This view is shared by Australia’s Office of the Chief Economist, which in December forecast strong iron ore prices throughout 2021 but said a possible reduction in Chinese steel output and stimulus, plus the recovery of major Brazilian mines, will pull prices back down in 2022.
For these reasons, not all banks have subscribed to Goldman Sachs’ optimistic view. “While there are a number of factors which suggest that we could be at the start of a supercycle, we still believe it is too early to call,” ING’s Warren Peterson said. “We would need to see robust and sustainable demand growth in the years ahead.”
So what does this mean for Mongolia?
While there isn’t yet a consensus on a supercycle, Mongolia should keep an eye on China as a gauge of whether one is getting underway.
“If we are to see the start of a new supercycle, this robust demand growth that we are seeing from China will have to be sustainable for several years,” Peterson said.
Vivek Dhar, a mining economist, agrees that China "holds the cards” and advises to watch out for Chinese stimulus in commodity-intensive sectors.
In the latest Five Year Plan, which was approved this week, Chinese Premier Li Keqiang promised infrastructure spending would continue at a very fast pace as one of the pillars for the country's 6+ percent economic growth plans. However, whether those policies meet the threshold for causing a global supercycle remains to be seen.
So on the question of whether Mongolia will benefit, the jury is still out. The ingredients for a commodity supercycle are present but there isn’t a consensus on whether we’re about to see a decade-long boom like the 2000s. When the jury does return it will likely make its decision based on Chinese policies and economic indicators.
Yet the possibility of a supercycle should still catch Mongolia’s eye. If the boom comes, now is the time to start thinking about how that money might be invested.
And after every boom comes a bust: perhaps a supercycle could be an opportunity for Mongolia to unshackle itself from the ups and downs of commodity exports and invest in a more stable economic future.
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