Commodities have seen a fairly big move this year and Richard Mills, writer of the Ahead of the Herd newsletter, believes we are not only at the beginning stages of a new commodities supercycle, but that it may even be bigger than the last one.
Here's what Rick had to say in a recent interview with FS Insider (see This One Commodity May Blow All Others Away in a New Bull Market, Says Rick Mills for audio).
A Long-Term Commodities Boom/Supercycle
The last major commodities boom or supercycle that started in the early 2000s was largely centered on China's insatiable demand for raw materials.
Millions of migrants poured into Chinese cities and the Chinese economy had rapidly transformed into a global manufacturing hub. This required an infrastructure build-out unlike anything the world had ever seen.
This time, however, it is not going to be centered on one country—it is going to be global, Mills stated.
“That's not the way this super cycle is going to work out,” Mills said. “This is going to be global. It's going to be all-encompassing. It is really going to encompass everything from energy, to food, to the metals.”
There are a number of global overriding themes set to push this supercycle into high gear, Mills noted. Furthermore, these sources are set to last for decades.
First, there is a massive, global push for infrastructure investment. Everything from roads, bridges, dams, water systems, and other basic infrastructure that we all rely on every day is antiquated.
Updating and upgrading infrastructure represents trillions of dollars in investment just to catch up, let alone add the modern infrastructure that we need, such as smart grid transmission lines and 5G networks. These are all commodity-intensive undertakings.
The next factor driving this supercycle is the global effort to electrify the transportation system. This requires a massive investment in lithium ion batteries as we turn away from fossil fuel energy sources.
There is also an international push to get away from carbon-producing energy sources: coal, oil, and natural gas. However, the production and build-out of renewable energy sources, such as solar and wind, require a massive use of commodities as well.
These first three themes are all going to be running at the same time, Mills stated, which will drive the coming commodity supercycle strongly.
“This supercycle is going to cover all of the aspects of the commodity market,” Mills said. “We're just coming out of the Covid-19 pandemic. China has been coming out of the pandemic quite well. Their manufacturing is rising at an unbelievable pace. … The rest of the world is going to come back too, and we're all going to be focused on these major overriding themes to put people back to work. This is why we're going to have a commodities bull market the likes of which we’ve never seen.”
What Commodities Will Do Best?
Copper has really taken the lead in the early stages of this cycle and will likely continue to do so far a variety of reasons. Every aspect of infrastructure investment—including transportation and the move to renewables—requires copper.
He also likes gold and silver, but for different reasons. Mills sees debt soaring, and debt-to-GDP ratios climbing, all of which are good for gold.
But the setup for copper is different because it faces both strong demand and a major shortfall in future supplies.
“I love copper,” Mills said. “The bottom line is, without copper, none of this is going to happen. None of it. … The copper market is already in a deficit. We've got 200 mines running out over the next few years. All our new supply for the foreseeable future is coming in from mines that haven't been commissioned yet. And we produce 20 million tons of copper a year. We need another 20 million tons of mined copper over the next 20 years. We have to ramp up to 40 million tons in the next 20 years. We're not going to do that.”
To listen to our full-length interview with Rick Mills on how he's investing in copper and the wider commodity space, click here. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe 3 days/week on all things economics, finance and markets...
Written by Ethan D. Mizer