Macquarie’s commodity supply map

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From Macquarie:

 We are certainly in a sweet spot for commodity prices at present, and it’s a good time to be a resource producer. The world is positioning for a healthy period of global reflation in 2017, adding investor support to a demand perspective which continues to surprise on the upside. Meanwhile, a lack of new supply projects is seeing the raw material end of value chains tighten in many cases. This is a very supportive environment for commodity prices.

 We believe many of the factors which have been helping commodities over the past six months will still be doing so in early 2017. Global manufacturing continues to recover, while the Chinese government has repeated their desire for market stability, which necessitates ongoing focus in infrastructure spending to underpin the 6.5% lower threshold for real GDP. Moreover, while property sales are now trending negative, we feel there is enough momentum in Chinese construction activity to sustain positive demand conditions through mid-year. With this, we continue to raise our demand forecasts for most metals and bulk commodities into 2017, and thus our price expectations.

 However, such periods don’t last forever. Commodity prices are cyclical after all, and we are looking at an industrial economy which is still underperforming the global economy as a whole, which itself is struggling to accelerate. The window of opportunity for resource producers remains open at present, but the question marks now surround the duration of this event. We feel a return to cost curve normality (but certainly not January 2016 lows) is likely over the coming 12 months, most likely through fading Chinese construction activity into mid-year.

 Into early next year, we would look for exposure to those commodities with raw material constraints or risks thereof, or those with cyclical margin expansion. These include stainless steel and its raw materials of nickel and chrome, alumina, cobalt and steel. However, into H2 2017 we see most commodity prices below today’s levels. In particular, we feel bulk commodities will see consistent downward pressure from today’s levels, though in the main producers will still be generating significant free cash flow.

 Our longer-term preferences for nickel, copper, silver and gold persist, while we are also more bullish than consensus on iron ore into 2020.

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Fair enough. I’m a little more bearish, more early but in the ball park.

I would take iron ore out of the “supply constraint” category on that map and see a bigger and longer dip before returning to the long run price at $60 sometime in the 2020s.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.