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A new round of regional industrialization transfer drives up the commodity cycle
2023/7/26
Since the financial crisis in 2008, commodity prices have experienced a downward cycle that lasted for more than ten years. Until the new crown pneumonia epidemic that swept the world in 2020, commodity prices bottomed out, and the CRB spot composite index soared from around 400 points in early 2020. The phased high of 644.07 points in May 2022 is still around 560 points, with a cumulative increase of about 40%. So far, the market has aroused the attention of the new round of commodity cycle, and there are some differences on the trend of the future cycle.
At present, most studies believe that commodity prices are highly correlated with economic cycles and financial cycles, and there is a mutual causal relationship. The author focuses on analyzing the commodity price cycle from the perspective of regional industrialization, and uses this to judge the future cycle trend.
Since 1900, the world has mainly experienced four major commodity long cycles, corresponding to several large-scale regional industrialization constructions in history. At present, the restructuring of the "nearshore and optimal shoreline" industrial chain under the anti-globalization is driving the commodity cycle upward through a new round of regional industrialization transfer. Judging from the progress of the current joint construction of the "Belt and Road", the demand for regional industrialization construction in the future still has great potential, especially in the western region of my country, India and Vietnam. At the same time, the global key mineral competition under anti-globalization will also affect the supply of some bulk commodities for a long time, and affect the prices of bulk commodities from both sides of supply and demand.
Commodities have experienced four super cycles
During the 122 years from 1900 to 2022, there will be a phased high in commodity prices basically every 30 years. Commodity prices will experience four long-term fluctuations, and there will be certain differentiation in the fluctuations. What is more significant is the increase in the prices of energy, precious metals and metal minerals. Taking 1900 as the origin, the cumulative increases were 355.98%, 142.23%, and 22.28%, respectively. Food prices have gradually declined after the realization of modern agricultural production. Grain prices have increased by -57.42% cumulatively, and meat prices have only increased by 5.01%. In addition, since the disintegration of the Bretton Woods system in 1971, the replaced "petroleum-dollar system" has significantly increased the volatility of commodities, especially the prices of energy and precious metals.
Commodity prices are determined by supply and demand, and the essential logic leading to the commodity price cycle is: the demand shock caused by the new economic growth point and the relative lag of the supply-side production capacity increase lead to price fluctuations. After filtering the commodity super cycle (removing long-term trends and short-term fluctuations), it is found that the length of a complete commodity cycle is generally about 30 years, and the duration of a round of price increases is often 15 to 16 years. After reaching the peak, the price enters a continuous decline range. What factors led to the rise in demand for as long as 15 years or so?
The author believes that the demand for raw materials caused by the rise of any single industry is often short-term, and the continuous rise of commodity prices in the long-term cycle obviously requires a huge and continuous increase in demand. For example, the process of large-scale industrialization on a regional scale means that when a country or region transforms from an agricultural society to an industrial society, it needs to invest in large-scale urbanization. This process will lead to a continuous increase in the demand for steel and cement needed for housing, infrastructure, and factories, as well as petrochemicals and metals needed for furniture, home appliances, and textiles. For example, the urbanization of the United States, post-World War II reconstruction, the four Asian tigers, and the rise of industrialization in China are all in line with the above-mentioned continuous demand for driving commodity prices, and also coincide with the four super commodity cycles in history.
From the perspective of the global mineral supply side, the peak production capacity also basically supports the above logic. According to the data of the International Energy Agency, the average time required for metal mines from exploration and discovery to production is about 16 years. When downstream demand grows rapidly and upstream raw material production capacity increases slowly, it will lead to continuous rise in commodity prices. In addition, geopolitical conflict factors will also push up commodity prices from both supply and demand sides. The eve of the two world wars was also at the starting point of the first two commodity super cycles. After that, the hot war on a global scale turned to local proxy wars, the cold war with economic and military confrontation, and the currency war with financial sniping as the main means. , respectively pushing up commodity prices. Therefore, combining important historical events and commodity price trends, it can be found that confrontation between international political groups, local hot wars, and industrialization transfer are important factors for the initiation of almost every round of commodity super cycle.
A new round of large-scale industrialization transfer is taking place
After each round of super cycle falls to the bottom, it is often accompanied by the emergence of another regional industrialization to lead the next round of super cycle. Why does the transfer of regional industrialization take over on a global scale?
To understand this question, we need to put aside short-term economic fluctuations and look for answers from the history of economic and political development of major countries in the world. According to the inverted U curve in Kuznets’ modern economic growth theory, with the transition from an agricultural society to an industrial society, the income gap between residents continues to rise, and when mass production transitions to mass consumption, the gap between rich and poor will reach its peak. In the process of industrial transformation, the industrialization and urbanization of advanced countries will lead to abundant capital under primitive accumulation, gradually excess production capacity, rising labor prices, and declining corporate profit margins. At this time, excess capital needs to be transferred to low-cost countries, and excess production capacity needs to be absorbed through exports. In the process of finding low-cost countries for capital and production capacity, low-cost follower countries will gradually enter industrialization and gradually digest the excess capacity of advanced countries. actual purchasing power.
Starting from the saturation of production capacity in the United Kingdom at the end of the nineteenth century, manufacturing began to transfer to the European continent and the United States. The United States, which undertook the industrial transfer, started the process of industrialization and became the world's largest economy through the two world wars. Since then, as the United States entered the post-industrialization period, it began to transfer part of its manufacturing industry to Asian countries, which led to the economic rise of the four Asian tigers and China. The cycle of industrialization transfer between countries in the past shows that with the acceleration of regional industrialization, the excess production capacity generated in the rapid economic growth needs to be transferred to expand the market and reduce production costs.
The economic development of China and the United States in the past also better explains the above theory. After China's accession to the WTO, China has entered a period of rapid industrialization and urbanization. Through cheap labor costs, the real purchasing power of middle- and low-income residents has been improved without a substantial increase in the real disposable income of American residents. At the same time, the U.S. dollars formed by a large trade surplus flowed back to the U.S. by investing in U.S. bonds, which supported the long-term low interest rates, low growth, and low inflation of the U.S. economy in the past. At present, China is undergoing the transformation from a processing export-oriented economy to a consumption-oriented economy, and some excess production capacity is also facing external transfer demand. The deep consumption-oriented economy of the United States is gradually facing the "hollowing out" of industries, and the United States in the post-industrial era needs "return of manufacturing" to re-support the US economy. When the two economic powers are facing the transformation of industrial structure at the same time, a new round of large-scale industrialization transfer is also taking place on a global scale.
Press the "accelerator key" to jointly build the "Belt and Road"
Judging from the current global economic structure, the region with the most large-scale industrialization and urbanization infrastructure in the future should be located in the Asian region along the "Belt and Road", and the process of industrialization and infrastructure construction in this region may press the "accelerator" .
Since 2021, the United States has continued to promote the return of manufacturing, but at present, the effect of the return of domestic manufacturing in the United States is not significant. Since 2022, the proportion of U.S. ADP manufacturing employment to non-agricultural employment has continued to decline. In May 2023, it will drop by 0.2 percentage points compared with the beginning of 2022, mainly due to the high operating costs in the United States. Compared with the return of manufacturing in the United States, the United States has greatly increased its imports of finished products from other countries, mainly including Mexico and Asia.
From the perspective of export structure, with the arrival of the inflection point of my country's population growth, the era of low labor costs has become history, and the talent bonus will gradually replace the demographic dividend. Since 2018, some Chinese companies have gradually moved to surrounding areas with lower labor costs, which has greatly promoted the regional industrialization of surrounding areas.
At the same time, the joint construction of the "Belt and Road" is expected to stimulate large-scale infrastructure investment in countries along the route and in western China. There are nearly 65 countries and regions involved in the "One Belt, One Road" route, with a total population of about 4.4 billion, sufficient labor force, and huge room for industrialization development. World Bank data show that the average population dependency ratio (ratio of the non-working-age population to the working-age population) of countries along the “Belt and Road” is lower than 50%, of which South Asian countries are only 44.7%, and Central and Eastern European countries are 47.7%. It is lower than the world average of 54.2%, and the demographic dividend is significant. In addition, there is a huge demand for infrastructure construction. The total mileage of railways in countries along the "Belt and Road" (excluding China) is about 320,000 kilometers, and the average density is 8 meters per square kilometer, which is far lower than China's 12 meters per square kilometer. In Japan and the United States, it is 62 meters per square kilometer and 23 meters per square kilometer. The per capita annual electricity consumption is less than 1,700 kWh, lower than the global average of 3,125 kWh. According to the calculation of the Asian Development Bank, from 2017 to 2030, the demand for infrastructure investment in Asia may reach as high as 26 trillion US dollars, with an average of 2.5 trillion US dollars per year.
The promotion and implementation of the joint construction of the "Belt and Road" initiative directly involves a large number of infrastructure construction projects, which are mainly concentrated in the manufacturing and construction industries. Based on the huge infrastructure and basic industrial construction needs of countries along the "Belt and Road", my country has signed a series of investment project contracts with countries along the route in recent years. According to the "2021 Statistical Bulletin on China's Foreign Direct Investment" jointly released by the Ministry of Commerce and other departments, in 2021, my country's investment in countries along the "Belt and Road" will account for 39% of the manufacturing industry. In 2022, the value of contracted projects by countries along the "Belt and Road" will reach 116.26 billion US dollars, accounting for 51.2% of my country's total foreign contracted projects.
In addition, in the past, my country's export-oriented economic construction was mainly based on maritime trade channels in the eastern coastal areas. In recent years, the infrastructure construction in coastal areas has been relatively complete, and the joint construction of the "Belt and Road" and the opening of land transportation routes in the west will continue to drive Investment in infrastructure in the western region, which was underinvested in the past, opened the "west gate" of China's foreign trade.
International Resource Competition Disrupts the Supply of Commodities
The industrialization and infrastructure construction in the above areas will continue to stimulate the demand for bulk commodities for a long time to come. At the same time, under the trend of anti-globalization, the restrictive policies of various countries on key minerals will also affect the supply pattern of some bulk commodities.
The confrontation between international political groups is an important factor affecting the commodity cycle. During the Cold War between the United States and the Soviet Union, both sides hoarded a large amount of reserve minerals, which led to a continuous rise in commodity prices since the 1960s. At present, various countries have formulated a series of policies for key minerals and strategic resources.
Since 2020, resource-rich countries represented by Chile, Peru, Argentina, and Australia have continuously introduced policies to restrict mineral exports, foreign investment and overseas smelting, and promote the nationalization of mineral resources, which has further intensified the anti-globalization trend of mineral resources . The global competition for key minerals is deconstructing the past "mineral resource globalization" pattern, pushing up the processing and production costs of global resources, which may hinder the supply of some key resources, and does not rule out the need for strategic excess reserves as competition intensifies.
To sum up, the author believes that the long-term price trend of bulk commodities is closely related to regional industrialization, and due to the law of political and economic development, regional industrialization takes place successively on a global scale. At present, a new round of regional industrialization transfer may lead to a continuous increase in the demand for bulk commodities in Asia and regions along the “Belt and Road”. At the same time, competition for key resources under deglobalization may also hinder the supply of global commodities. Simultaneous structural changes on the demand side and the supply side will drive a new round of long-term commodity cycles to continue upward.
At present, most studies believe that commodity prices are highly correlated with economic cycles and financial cycles, and there is a mutual causal relationship. The author focuses on analyzing the commodity price cycle from the perspective of regional industrialization, and uses this to judge the future cycle trend.
Since 1900, the world has mainly experienced four major commodity long cycles, corresponding to several large-scale regional industrialization constructions in history. At present, the restructuring of the "nearshore and optimal shoreline" industrial chain under the anti-globalization is driving the commodity cycle upward through a new round of regional industrialization transfer. Judging from the progress of the current joint construction of the "Belt and Road", the demand for regional industrialization construction in the future still has great potential, especially in the western region of my country, India and Vietnam. At the same time, the global key mineral competition under anti-globalization will also affect the supply of some bulk commodities for a long time, and affect the prices of bulk commodities from both sides of supply and demand.
Commodities have experienced four super cycles
During the 122 years from 1900 to 2022, there will be a phased high in commodity prices basically every 30 years. Commodity prices will experience four long-term fluctuations, and there will be certain differentiation in the fluctuations. What is more significant is the increase in the prices of energy, precious metals and metal minerals. Taking 1900 as the origin, the cumulative increases were 355.98%, 142.23%, and 22.28%, respectively. Food prices have gradually declined after the realization of modern agricultural production. Grain prices have increased by -57.42% cumulatively, and meat prices have only increased by 5.01%. In addition, since the disintegration of the Bretton Woods system in 1971, the replaced "petroleum-dollar system" has significantly increased the volatility of commodities, especially the prices of energy and precious metals.
Commodity prices are determined by supply and demand, and the essential logic leading to the commodity price cycle is: the demand shock caused by the new economic growth point and the relative lag of the supply-side production capacity increase lead to price fluctuations. After filtering the commodity super cycle (removing long-term trends and short-term fluctuations), it is found that the length of a complete commodity cycle is generally about 30 years, and the duration of a round of price increases is often 15 to 16 years. After reaching the peak, the price enters a continuous decline range. What factors led to the rise in demand for as long as 15 years or so?
The author believes that the demand for raw materials caused by the rise of any single industry is often short-term, and the continuous rise of commodity prices in the long-term cycle obviously requires a huge and continuous increase in demand. For example, the process of large-scale industrialization on a regional scale means that when a country or region transforms from an agricultural society to an industrial society, it needs to invest in large-scale urbanization. This process will lead to a continuous increase in the demand for steel and cement needed for housing, infrastructure, and factories, as well as petrochemicals and metals needed for furniture, home appliances, and textiles. For example, the urbanization of the United States, post-World War II reconstruction, the four Asian tigers, and the rise of industrialization in China are all in line with the above-mentioned continuous demand for driving commodity prices, and also coincide with the four super commodity cycles in history.
From the perspective of the global mineral supply side, the peak production capacity also basically supports the above logic. According to the data of the International Energy Agency, the average time required for metal mines from exploration and discovery to production is about 16 years. When downstream demand grows rapidly and upstream raw material production capacity increases slowly, it will lead to continuous rise in commodity prices. In addition, geopolitical conflict factors will also push up commodity prices from both supply and demand sides. The eve of the two world wars was also at the starting point of the first two commodity super cycles. After that, the hot war on a global scale turned to local proxy wars, the cold war with economic and military confrontation, and the currency war with financial sniping as the main means. , respectively pushing up commodity prices. Therefore, combining important historical events and commodity price trends, it can be found that confrontation between international political groups, local hot wars, and industrialization transfer are important factors for the initiation of almost every round of commodity super cycle.
A new round of large-scale industrialization transfer is taking place
After each round of super cycle falls to the bottom, it is often accompanied by the emergence of another regional industrialization to lead the next round of super cycle. Why does the transfer of regional industrialization take over on a global scale?
To understand this question, we need to put aside short-term economic fluctuations and look for answers from the history of economic and political development of major countries in the world. According to the inverted U curve in Kuznets’ modern economic growth theory, with the transition from an agricultural society to an industrial society, the income gap between residents continues to rise, and when mass production transitions to mass consumption, the gap between rich and poor will reach its peak. In the process of industrial transformation, the industrialization and urbanization of advanced countries will lead to abundant capital under primitive accumulation, gradually excess production capacity, rising labor prices, and declining corporate profit margins. At this time, excess capital needs to be transferred to low-cost countries, and excess production capacity needs to be absorbed through exports. In the process of finding low-cost countries for capital and production capacity, low-cost follower countries will gradually enter industrialization and gradually digest the excess capacity of advanced countries. actual purchasing power.
Starting from the saturation of production capacity in the United Kingdom at the end of the nineteenth century, manufacturing began to transfer to the European continent and the United States. The United States, which undertook the industrial transfer, started the process of industrialization and became the world's largest economy through the two world wars. Since then, as the United States entered the post-industrialization period, it began to transfer part of its manufacturing industry to Asian countries, which led to the economic rise of the four Asian tigers and China. The cycle of industrialization transfer between countries in the past shows that with the acceleration of regional industrialization, the excess production capacity generated in the rapid economic growth needs to be transferred to expand the market and reduce production costs.
The economic development of China and the United States in the past also better explains the above theory. After China's accession to the WTO, China has entered a period of rapid industrialization and urbanization. Through cheap labor costs, the real purchasing power of middle- and low-income residents has been improved without a substantial increase in the real disposable income of American residents. At the same time, the U.S. dollars formed by a large trade surplus flowed back to the U.S. by investing in U.S. bonds, which supported the long-term low interest rates, low growth, and low inflation of the U.S. economy in the past. At present, China is undergoing the transformation from a processing export-oriented economy to a consumption-oriented economy, and some excess production capacity is also facing external transfer demand. The deep consumption-oriented economy of the United States is gradually facing the "hollowing out" of industries, and the United States in the post-industrial era needs "return of manufacturing" to re-support the US economy. When the two economic powers are facing the transformation of industrial structure at the same time, a new round of large-scale industrialization transfer is also taking place on a global scale.
Press the "accelerator key" to jointly build the "Belt and Road"
Judging from the current global economic structure, the region with the most large-scale industrialization and urbanization infrastructure in the future should be located in the Asian region along the "Belt and Road", and the process of industrialization and infrastructure construction in this region may press the "accelerator" .
Since 2021, the United States has continued to promote the return of manufacturing, but at present, the effect of the return of domestic manufacturing in the United States is not significant. Since 2022, the proportion of U.S. ADP manufacturing employment to non-agricultural employment has continued to decline. In May 2023, it will drop by 0.2 percentage points compared with the beginning of 2022, mainly due to the high operating costs in the United States. Compared with the return of manufacturing in the United States, the United States has greatly increased its imports of finished products from other countries, mainly including Mexico and Asia.
From the perspective of export structure, with the arrival of the inflection point of my country's population growth, the era of low labor costs has become history, and the talent bonus will gradually replace the demographic dividend. Since 2018, some Chinese companies have gradually moved to surrounding areas with lower labor costs, which has greatly promoted the regional industrialization of surrounding areas.
At the same time, the joint construction of the "Belt and Road" is expected to stimulate large-scale infrastructure investment in countries along the route and in western China. There are nearly 65 countries and regions involved in the "One Belt, One Road" route, with a total population of about 4.4 billion, sufficient labor force, and huge room for industrialization development. World Bank data show that the average population dependency ratio (ratio of the non-working-age population to the working-age population) of countries along the “Belt and Road” is lower than 50%, of which South Asian countries are only 44.7%, and Central and Eastern European countries are 47.7%. It is lower than the world average of 54.2%, and the demographic dividend is significant. In addition, there is a huge demand for infrastructure construction. The total mileage of railways in countries along the "Belt and Road" (excluding China) is about 320,000 kilometers, and the average density is 8 meters per square kilometer, which is far lower than China's 12 meters per square kilometer. In Japan and the United States, it is 62 meters per square kilometer and 23 meters per square kilometer. The per capita annual electricity consumption is less than 1,700 kWh, lower than the global average of 3,125 kWh. According to the calculation of the Asian Development Bank, from 2017 to 2030, the demand for infrastructure investment in Asia may reach as high as 26 trillion US dollars, with an average of 2.5 trillion US dollars per year.
The promotion and implementation of the joint construction of the "Belt and Road" initiative directly involves a large number of infrastructure construction projects, which are mainly concentrated in the manufacturing and construction industries. Based on the huge infrastructure and basic industrial construction needs of countries along the "Belt and Road", my country has signed a series of investment project contracts with countries along the route in recent years. According to the "2021 Statistical Bulletin on China's Foreign Direct Investment" jointly released by the Ministry of Commerce and other departments, in 2021, my country's investment in countries along the "Belt and Road" will account for 39% of the manufacturing industry. In 2022, the value of contracted projects by countries along the "Belt and Road" will reach 116.26 billion US dollars, accounting for 51.2% of my country's total foreign contracted projects.
In addition, in the past, my country's export-oriented economic construction was mainly based on maritime trade channels in the eastern coastal areas. In recent years, the infrastructure construction in coastal areas has been relatively complete, and the joint construction of the "Belt and Road" and the opening of land transportation routes in the west will continue to drive Investment in infrastructure in the western region, which was underinvested in the past, opened the "west gate" of China's foreign trade.
International Resource Competition Disrupts the Supply of Commodities
The industrialization and infrastructure construction in the above areas will continue to stimulate the demand for bulk commodities for a long time to come. At the same time, under the trend of anti-globalization, the restrictive policies of various countries on key minerals will also affect the supply pattern of some bulk commodities.
The confrontation between international political groups is an important factor affecting the commodity cycle. During the Cold War between the United States and the Soviet Union, both sides hoarded a large amount of reserve minerals, which led to a continuous rise in commodity prices since the 1960s. At present, various countries have formulated a series of policies for key minerals and strategic resources.
Since 2020, resource-rich countries represented by Chile, Peru, Argentina, and Australia have continuously introduced policies to restrict mineral exports, foreign investment and overseas smelting, and promote the nationalization of mineral resources, which has further intensified the anti-globalization trend of mineral resources . The global competition for key minerals is deconstructing the past "mineral resource globalization" pattern, pushing up the processing and production costs of global resources, which may hinder the supply of some key resources, and does not rule out the need for strategic excess reserves as competition intensifies.
To sum up, the author believes that the long-term price trend of bulk commodities is closely related to regional industrialization, and due to the law of political and economic development, regional industrialization takes place successively on a global scale. At present, a new round of regional industrialization transfer may lead to a continuous increase in the demand for bulk commodities in Asia and regions along the “Belt and Road”. At the same time, competition for key resources under deglobalization may also hinder the supply of global commodities. Simultaneous structural changes on the demand side and the supply side will drive a new round of long-term commodity cycles to continue upward.
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