A good piece here from TS Lombard sums up the moment we’ve got for commodities. In short, whatever you think about long-term structural arguments for commodities’ strength, the cycle is about to wipe them out.
Is the latest price action in commodities just a bump on the road or a harbinger of tougher times ahead? While the secular metals-driven bull run has legs, from a cyclical standpoint a deteriorating balance of risks raises the bar for sustained strength. Two-year anniversary. Commodity prices have soared since the spring 2020 lows, underpinned by a combination of strong macro momentum (post-pandemic recovery supported by large-scale policy easing), solid ‘micro’ fundamentals (deficient supply exposed by accelerating demand) and buoyant risk sentiment. Geopolitical turbulence (Ukraine crisis) turbocharged the advance this year but also entailed a jump in volatility that has only recently started to wane. In short, the stars have aligned for strong performance on the back of a simultaneous rallyin energy, industrials, precious metals and agricultural commodities. Can this continue? While at this juncture it is difficult to hold an outright negative view, chances are that the market takes a breather rather than reaccelerate sover the coming months.
Tight supply-demand balances are not going away anytime soon. Shortages in agricultural commodities are unlikely to let up for the foreseeable future. So is the scramble to secure key base metals which, coupled with disruptions to primary output caused by spiking energy costs, is bound to leave stockpile levels thin and forward curves heavily backwardated. The Russia conflict is keeping the pressure on oil inventories as the pick-up in OPEC and US crude output still leaves a lot to be desired.
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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.
