Visualizing the Commodity Super Cycle
Since the beginning of the Industrial Revolution, the world has seen its population and the need for natural resources boom.
As more people and wealth translate into the demand for global goods, the prices of commodities—such as energy, agriculture, livestock, and metals—have often followed in sync.
This cycle, which tends to coincide with extended periods of industrialization and modernization, helps in telling a story of human development.
Why are Commodity Prices Cyclical?
Commodity prices go through extended periods during which prices are well above or below their long-term price trend. There are two types of swings in commodity prices: upswings and downswings.
Many economists believe that the upswing phase in super cycles results from a lag between unexpected, persistent, and positive trends to support commodity demand with slow-moving supply, such as the building of a new mine or planting a new crop. Eventually, as adequate supply becomes available and demand growth slows, the cycle enters a downswing phase.
While individual commodity groups have their own price patterns, when charted together they form extended periods of price trends known as “Commodity Super Cycles” where there is a recognizable pattern across major commodity groups.
How can a Commodity Super Cycle be Identified?
Commodity super cycles are different from immediate supply disruptions; high or low prices persist over time.
In our above chart, we used data from the Bank of Canada, who leveraged a statistical technique called an asymmetric band pass filter. This is a calculation that can identify the patterns or frequencies of events in sets of data.
Economists at the Bank of Canada employed this technique using their Commodity Price Index (BCPI) to search for evidence of super cycles. This is an index of the spot or transaction prices in U.S. dollars of 26 commodities produced in Canada and sold to world markets.
- Energy: Coal, Oil, Natural Gas
- Metals and Minerals: Gold, Silver, Nickel, Copper, Aluminum, Zinc, Potash, Lead, Iron
- Forestry: Pulp, Lumber, Newsprint
- Agriculture: Potatoes, Cattle, Hogs, Wheat, Barley, Canola, Corn
- Fisheries: Finfish, Shellfish
Using the band pass filter and the BCPI data, the chart indicates that there are four distinct commodity price super cycles since 1899.
The first cycle coincides with the industrialization of the United States in the late 19th century.
The second began with the onset of global rearmament before the Second World War in the 1930s.
The third began with the reindustrialization of Europe and Japan in the late 1950s and early 1960s.
- 1996 – Present:
The fourth began in the mid to late 1990s with the rapid industrialization of China
What Causes Commodity Cycles?
The rapid industrialization and growth of a nation or region are the main drivers of these commodity super cycles.
From the rapid industrialization of America emerging as a world power at the beginning of the 20th century, to the ascent of China at the beginning of the 21st century, these historical periods of growth and industrialization drive new demand for commodities.
Because there is often a lag in supply coming online, prices have nowhere to go but above long-term trend lines. Then, prices cannot subside until supply is overshot, or growth slows down.
Is This the Beginning of a New Super Cycle?
The evidence suggests that human industrialization drives commodity prices into cycles. However, past growth was asymmetric around the world with different countries taking the lion’s share of commodities at different times.
With more and more parts of the world experiencing growth simultaneously, demand for commodities is not isolated to a few nations.
Confined to Earth, we could possibly be entering an era where commodities could perpetually be scarce and valuable, breaking the cycles and giving power to nations with the greatest access to resources.
Each commodity has its own story, but together, they show the arc of human development.
How China Overtook the U.S. as the World’s Major Trading Partner
China has become the world’s major trading partner – and now, 128 of 190 countries trade more with China than they do with the United States.
How China Overtook the U.S. As the World’s Trade Partner
In 2018, trade accounted for 59% of global GDP, up nearly 1.5 times since 1980.
Over this timeframe, international trade has transformed significantly—not just in terms of volume and composition, but also in terms of the countries that the rest of the world leans on for their most important trade relationships.
Now, a critical shift is occurring in the landscape, and it may surprise you to learn that China has already usurped the U.S. as the world’s most dominant trading partner.
Trading Places: A Global Shift
Today’s animation comes from the Lowy Institute, and it pulls data from the International Monetary Fund (IMF) database on bilateral trade flows, to determine whether the U.S. or China is a bigger trading partner for each country from 1980 to 2018.
The results are stark: before 2000, the U.S. was at the helm of global trade, as over 80% of countries traded with the U.S. more than they did with China. By 2018, that number had dropped sharply to just 30%, as China swiftly took top position in 128 of 190 countries.
The researchers pinpoint China’s 2001 entry into the World Trade Organization as a major turning point in China’s international trade relationships. The dramatic shift that followed is clearly demonstrated in the visualization above—between 2005 and 2010, a number of countries tipped towards Chinese influence, especially in Africa and Asia.
Over time, China’s dominance has grown dramatically. It’s no wonder then, that China and the U.S. have a contentious trade relationship themselves, as both nations battle it out for first place.
A Tale of Two Economies
The United States and China are competitors in many ways, but to be successful they must rely on each other for mutually beneficial trade. However, it’s also the major issue on which they are struggling to reach a common ground.
The U.S. has been vocal about negotiating more balanced trade agreements with China. In fact, a mid-2018 poll shows that 62% of Americans consider their trade relationship with China to be unfair.
Since 2018, both parties have faced a fraught relationship, imposing major tariffs on consumer and industrial goods—and retaliations are reaching greater and greater heights:
While a delicate truce has been reached at the moment, the trade war has caused a significant drag on global growth, and the World Bank estimates it will continue to have an effect into 2021.
At the same time, China’s sphere of influence continues to grow.
One Belt, One Road, One Trade Direction?
China seems to have a finger in every pie. The nation is financing a flurry of megaprojects across Asia and Africa—but one broader initiative stands above the rest.
China’s “One Belt, One Road” (OBOR) Initiative, planned for a 2049 completion, is advancing at a furious pace. In 2019 alone, Chinese companies signed contracts worth up to $128 billion to start Chinese large-scale infrastructure projects in various countries.
While building new highways and ports abroad is beneficial for Chinese financiers, OBOR is also about creating new markets and trade routes for Chinese goods in Asia. Recent research found that the OBOR program’s infrastructure expansion and logistics performance improvements led to positive effects on China’s exports.
Nevertheless, it’s clear the new infrastructure network is already transforming global trade, possibly cementing China’s position as the world’s major trading partner for years to come.
Visualizing the Biggest Risks to the Global Economy in 2020
The Global Risk Report 2020 paints an unprecedented risk landscape for 2020—one dominated by climate change and other environmental concerns.
Top Risks in 2020: Dominated by Environmental Factors
Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.
While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.
Front and Center
Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.
According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:
|Top Global Risks (by "Likelihood")||Top Global Risks (by "Impact")|
|#1||Extreme weather||#1||Climate action failure|
|#2||Climate action failure||#2||Weapons of mass destruction|
|#3||Natural disasters||#3||Biodiversity loss|
|#4||Biodiversity loss||#4||Extreme weather|
|#5||Humanmade environmental disasters||#5||Water crises|
With more emphasis being placed on environmental risks, how much do we need to worry?
According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.
While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.
The Stranded Assets Dilemma
If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.
Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.
The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.
– Institute for Energy Economics and Financial Analysis
The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:
- Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
- Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
- New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.
A Tough Road Ahead
In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.
These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.
Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:
- Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
- Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
- An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.
The Ball Is In Our Court
It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.
How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.
Markets1 year ago
The Jeff Bezos Empire in One Giant Chart
Maps1 year ago
Mercator Misconceptions: Clever Map Shows the True Size of Countries
Advertising12 months ago
Meet Generation Z: The Newest Member to the Workforce
Misc1 year ago
24 Cognitive Biases That Are Warping Your Perception of Reality
Advertising10 months ago
How the Tech Giants Make Their Billions
Technology1 year ago
The 20 Internet Giants That Rule the Web
Chart of the Week1 year ago
Chart: The World’s Largest 10 Economies in 2030
Environment11 months ago
The World’s 25 Largest Lakes, Side by Side