MACQUARIE: Here's where commodities sit in the price cycle, and where they'll head in the next 2 years

Photo by Michael Steele/Getty Images

2016 has been a year of surprises: Trump, Brexit, Leicester City, just to name a few.

However, for financial markets, few can surpass the performance of commodity prices. Some might argue that the rebound in the Chinese economy has been somewhat of a surprise, particularly after some of the hysteria heard earlier this year but in reality the two are intertwined.

With the odd exception, they’ve had a stellar year, posting some amazing gains after years of capital-eroding, investment-extinguishing price declines.

Now, after the recovery, comes the obvious question.

While no one can say with any certainty as to what lies ahead — particularly with Donald Trump now just a month away from entering the oval office — some believe that recent developments will lay the foundations for what lies ahead.

Commodities, after all, are a cyclical asset class, moving largely in response to shifts in supply and demand — unless you’re talking about intraday swings in Chinese commodity futures, of course.

Armed with that knowledge, analysts at Macquarie Research have updated this excellent flow chart that shows where major commodities sit in the current price cycle, and where they’re likely to move to looking a couple of years ahead.

It’s really a great way to demonstrate the cyclical nature of commodities, both from a supply and demand perspective, with the arrow indicative of where Macquarie thinks each market will transition to.

In the first half of 2017, the bank says that it is looking 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,” it says.

However, as the year progresses, it sees most commodity prices below current levels.

“In particular, we feel bulk commodities will see consistent downward pressure from today‚Äôs levels,” it says, something for consideration in Australia given these are among the nation’s largest goods exports by dollar value.

Over the longer-term, Macquarie says that it has a preference for nickel, copper, silver and gold. It also acknowledges that it is also more bullish than consensus on iron ore into the end of the decade.

As for those commodities to avoid, it says that it would avoid sustained exposure to steel, aluminium, alumina and thermal coal.

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