Jeff Currie, Goldman Sachs - Why ESG May Make This Commodity Supercycle Different From Past Cycles | #445

Episode Summary

Executive Summary: Jeff Curry argues the world is in a commodity super cycle driven by policy-shifted demand, chronic underinvestment in legacy supply, and ESG-related capital constraints. He says rate hikes can cool prices temporarily, but only new investment fixes shortages. He remains bullish oil, copper, aluminum, and grains, and warns Europe’s energy crisis may be prolonged by policy responses.

Main Topics: Commodity super cycle thesis (Priority: 5/5): Curry says the super cycle began around October 2020 when COVID and policy shifts toward social need boosted volumetric commodity demand while supply lagged. Underinvestment in old-economy supply (Priority: 5/5): Capital rotated from energy, mining, and other resource sectors into tech, leaving insufficient investment in drilling, refining, mines, and power generation. Policy, inflation, and the Fed (Priority: 4/5): He argues rate hikes can suppress demand and prices temporarily, but do not solve the structural shortage of production capacity; policy can also reinforce inflation. Europe’s energy crisis (Priority: 5/5): Curry says Europe faces severe gas and power constraints, but market adaptation may avert worst-case outcomes; he is more worried about policy mistakes like price caps. ESG and capital misallocation (Priority: 4/5): He criticizes ESG as a voluntary framework that fails to solve pollution or supply issues, arguing that carbon pricing and enforceable rules are needed instead. Commodity investment opportunities (Priority: 5/5): He highlights oil, copper, aluminum, and grains as attractive due to low inventories, supply bottlenecks, and long-term demand from electrification and food needs.

Key Arguments: COVID shifted macro policy toward social need, increasing demand from lower-income groups that consume most food, fuel, and capital goods. Commodity booms are driven by volume, not dollars; rich households cannot create inflation because they do not control the physical volume of consumption. The current cycle is a replay of past cycles where capital fled old-economy sectors, causing years of underinvestment and eventual shortages. Interest-rate hikes reduce inflation only temporarily; lasting disinflation requires new investment that expands production capacity and de-bottlenecks supply. The market may be pricing in a recession too early, as in 2006 and 1994-95, while inventories are still falling and shortages remain. European gas prices may ease seasonally, but the bigger risk is policy responses such as price caps and subsidy structures that distort investment incentives. ESG does not create compliance or enforce pollution costs; carbon taxes, fines, and regulation are required for efficient capital allocation. Oil remains the key macro commodity and hedge against inflation; copper is essential for electrification; aluminum may be an especially strong long-term story due to the climate paradox. Food and energy are linked through the carbon cycle; underinvestment in fossil fuels and fertilizer inputs harms crop yields and worsens grain shortages.

Data Points: Super cycle start: October 2020 - Curry dates the current commodity super cycle thesis to the onset of COVID-era policy changes. Length of prior super cycles: 12 years - He cites the 1968-1980 and 2002-2014 commodity cycles as examples. Old cycle start: 1968 - He links the prior inflationary commodity cycle to Great Society spending. Old cycle end: 1980 - He says the 1968 cycle ended after about 12 years. 2000s cycle start: January 2002 - He ties this cycle to China’s WTO entry and new demand growth. 2000s cycle end: 2014 - He says the 2000s cycle lasted about 12 years as well. Real interest rate move: -50 bps to +100 bps - He says real rates rose 150 basis points, pressuring commodities lower. SPR release impact: ~1 million barrels/day - He says US strategic petroleum reserve releases added roughly this amount back into market supply. EU gas price target: sub-100 euros/MWh - He forecasts European gas falling below this level in January-February. Oil price target: $130/barrel - He sees oil still capable of rising from the then-current ~$95 level. Oil decline over three weeks: -$25/barrel - He notes US oil investment rates fell sharply over a recent three-week period. Coal free cash flow yield: 75%-100% - He says some coal companies trade at extremely high free cash flow yields, implying very cheap valuations. Energy sector share of S&P 500: ~2% - He references how far the energy sector had fallen as a share of the index after years of neglect. Oil sector past high weight: ~30% - He cites the sector’s historical weight in the S&P during prior energy booms. Natural gas price move (2001 example): $2 to $10 per MMBtu - He recalls the US natural gas spike during the 2001 energy crisis. Refinery build time: 5+ years - He says new refineries take years, limiting short-term supply response. Copper mine build time: 7+ years - He uses copper mining as an example of long lead times for new supply. Shale infrastructure lead time: 6 months plus 2-3 years - He distinguishes fast shale drilling from slower supporting infrastructure needs. Industrial jobs shifted: 2.5 million jobs - He says industrial demand left the US during the early-2000s gas crisis and helped drive Europe’s later role.

Pivotal Quotes: "Rich guys can't create inflation. It's impossible. There's simply not enough of them. Only the world's low-income groups can do that because they have the volume." — Jeff Curry: Explaining why commodity inflation is driven by physical consumption volume, not financial wealth. "Rate hikes cure the symptom, which is inflation, but only investment can cure the underlying illness, which is a lack of production capacity." — Jeff Curry: Describing why monetary policy can’t permanently fix commodity shortages. "Without cost, there is no market." — Jeff Curry: Arguing that effective environmental policy requires enforceable prices, taxes, or penalties.

Implications: Investors should view commodities as a long-cycle, supply-constrained asset class, not a short-term trade. Curry’s framework implies persistent inflation risk, continued volatility, and opportunity in hard assets, especially oil, copper, aluminum, and grains, while Europe’s energy policy remains a key risk.