CYCLICAL TRENDS

Cyclical trends are non-permanent trends that reverse over a period of time. Cyclical trends can be observed at many different levels:

Economic cycle: It refers to the typical process an economy takes to go from expansion to recession and back. The stages in economic life cycle can be broken into four phases:

(i) Expansion / Boom: The expansion is characterized by increased consumption of goods and services driven by higher income, lower interest rates and high level of consumer confidence. High demand for products results in higher production and higher employment which in turn keeps the momentum on the consumption high. Booming economy increases consumer and business confidence. Thus, businesses plan capacity expansion and consumers plan to acquire long term assets. As businesses and consumers seek loans to fund such expenditure, it results in overall increase in borrowing and thus leads to higher interest rates. Higher consumption also results in high inflation as the economy reaches the peak. Manufacturers invest in capacity expansion anticipating higher future demand.

(ii) Slow down: As economy reaches the peak, higher prices and higher interest rates start to discourage consumption. Further, to control inflation, central banks may start following tighter monetary policies. These factors result in slow down of the growth. Thus, even though the consumption is on the rise, the rate of increase is lower. Several manufacturers who invested in capacity expansion anticipating demand start witnessing lower capacity utilization rates.

(iii) Recession: As utilization rates are low, manufacturers cut down on their further expansion plans. Further, to control cost, they may begin layoffs. This results in increase in unemployment, decrease in income levels and in turn decrease in consumption. Decreasing consumption causes losses and more unemployment and the cycle sustains the decreased consumption. Consumer confidence declines. Consumers start saving rather than borrowing and/or spending. This results in a decline in interest rates. Further, reduced consumption also brings down the inflation rate.

(iv) Recovery: Low inflation rate enables central banks to loosen their monetary policy and extend liquidity in the market. With relatively easy availability of money and decrease in prices, consumers start buying goods and services. This results in economic activity picking up and eventually results in return of expansionary phase.

Although the economy keeps going through these phases, the length of these phases is unpredictable.

Commodity cycle: Prices of many hard commodities tend to go up and down in cycles. Most often the commodity cycle is driven by economic cycles. During expansionary phase, commodity prices tend to go up driven by increased demand and the prices tend to fall during recession. However, at times, the commodity cycle also occurs independent of the economic cycle.

When commodity prices increase, suppliers of these commodities may increase their production capacity in order to take advantage of the higher prices. However, as many suppliers increase capacity, the prices of commodity may come down. As prices fall, suppliers who have high cost of production may find it uneconomical to run the operation and may abandon the capacity. As supply decrease, the price may once again increase.

Inventory cycle: Inventory cycles are short term cycles that occur within a commodity cycle. These occur on account of inventory adjustments by producers and customers. Customers who may have huge inventory may temporarily reduce procurement. This would result in high inventory pile up at the suppliers’ end resulting in fall in prices. Similarly, during a downturn, cautious customers may significantly reduce their procurement. However, if demand for their products improves marginally, they may not have adequate inventory and will have to go for

immediate procurement. This can result in prices increasing.

In April 2020, huge inventory of crude oil in Oklahoma resulted in the price of crude oil futures crashing and trading at around USD 20 per barrel. It temporarily even went into the negative territory. However, as the inventory situation improved, the prices improved, and futures contract were trading at around USD 40 per barrel in June 2020.