In the eyes of some market analysts, the tripling of commodity prices between 2003 and 2006 was more than simply another bull market – it was the upswing of a so-called commodity supercycle, a protracted boom driven by roaring Chinese demand growth. For some skeptics, the supercycle concept was theoretically underdeveloped, more marketing than substance. It is true that proponents of the idea, operating outside the realm of university economics departments, left its theoretical dimensions underspecified. But a closer examination of long-term price data for commodities, and the economic concepts that underlie them, suggest that prolonged periods of rising and falling prices are intrinsic to these markets, both phases of the cycle sowing the seeds of the other. The duration and magnitude of the bull market that began shortly after the year 2000 are not uncharacteristic of other booms that have taken place over the past century. In terms of short-term horizons, supply and demand behavior for many commodities helps account for the relatively high volatility of these markets. Over very long periods of time, however, the inflation-adjusted prices of primary commodities show a stagnating or slightly declining trajectory.

THE ORIGINS OF THE COMMODITY SUPERCYCLE IDEA

Alan Heap, a commodity strategist at Citigroup, published what became the most widely cited articulation of the commodity supercycle thesis in a March 2005 note, China: The Engine of a Commodities Super Cycle. Heap argued that a commodity supercycle was already underway. This boom was responsible for the postmillennial takeoff in natural resources. He defined a supercycle as a “prolonged (decade or more) trend in real commodity prices driven by urbanization and industrialization of a major economy.” The upswing portions of these cycles last between ten and thirty-five years, Heap argued, making the timing of a full cycle last as many as seventy years. In his view, two supercycles had occurred in the prior 150 years. The first one stretched from the late 1800s through the early twentieth century, fueled by the materials-intensive economic expansion of the United States, while the second cycle ran from roughly 1945 through 1957 in tandem with the postwar reconstruction of Europe and Japan. The third such cycle was just taking off, in his view.