Copper boom is not just another commodity supercycle

Global asset manager Ninety One has argued that the current rally in copper and other commodities differs from past market supercycles, with solid demand meeting a much more constrained supply response.

AI, data centres, electrification and infrastructure are driving fresh demand for resources at present, pushing metals like copper to new highs. Riding that wave, Australian majors like BHP are leaning into the theme and emerging as the ASX’s dominant narrative this year, wrestling market leadership from the major banks — including CBA.

Ninety One’s head of natural resources Paul Gooden believes it is distinct from past commodity supercycles. “I wouldn’t call this another commodity supercycle. The 2000s were fundamentally a China demand story. This time, new sources of demand — including AI and data centres — are meeting a much more constrained supply response as companies remain disciplined about adding production,” Gooden said.

The commodity supercycle of the 2000s was dominated by an extraordinary demand shock as China’s rapid industrialisation and urbanisation consumed huge amounts of energy and raw materials. Today’s environment is different, with demand sources that are both more diverse and being met from a different starting point.

Resource companies have become more disciplined after a period where aggressive investment in new production often destroyed shareholder value and created excess supply. They now prioritise returns and free cash flow over production growth, as investors demand income through dividends and buybacks.

The firm noted that the average free-cash-flow yield of companies in its natural resources portfolio is currently around 8 per cent compared with around 4 per cent for the broader equity market.

Natural resources companies are all about cash flows now, unlike many tech companies that have led equity markets for some time, which are essentially long-duration assets whose value hinges on profits expected far into the future.

Many natural-resource companies are generating substantial cash flows today, producing cash, paying dividends and buying back shares rather than relying on profits many years into the future, Gooden said.

Ninety One added that the improving structural backdrop also follows a prolonged period in which commodities had derated relative to equities. The Bloomberg Commodity Index-to-Dow Jones ratio remains near the low end of its long-term range, indicating how far commodities had fallen out of favour, according to the firm’s analysis of Bloomberg data to 30 June.

“Natural resources have spent a long period out of favour, but the fundamental backdrop is changing. Resource security is becoming more important, new sources of demand are emerging and supply remains disciplined. What makes that particularly interesting for investors is the starting point: expectations and valuations are fairly low versus history,” Gooden said.

The future may be digital, but it will still have to be built, powered and mined, making natural resources essential.