After being the global whipping boy of markets for the best part of five years, commodities have emerged from the ashes this year.
Boosted by an unexpected and prolonged Chinese infrastructure stimulus push, reduced supply in some markets, a pullback in capital expenditure from miners and, more recently, signs that fiscal stimulus may be about to deployed to bolster flagging economic growth, it’s been a stellar recovery for many commodity prices since the depths seen in the first quarter of years.
Mining stocks have been in demand as a result. While there still may be more of this move to go, it may be time to more become more discerning as to what commodities, and as a result what miners, investors should be seeking out.
Enter Macquarie Bank’s commodity research team who, perhaps fortuitously, have just released a note on what commodities it expects to outperform, and which ones it thinks will lag the pack, over the next two years.
The chart below from Macquarie shows where it believes individual commodities sit in their price cycle, and where they expect them to head over the next 12-24 months.
Regular readers would have seen similar charts from Macquarie before. The only difference on this occasion is that many commodities have shifted further right on the chart, indicating that prices are likely to stabilise, or increase, in the years ahead.
“We have seen a shift to the right for many, with inventories now starting to draw,” it says.
Here’s a list of the commodities that are likely to outperform on a 12-24 month basis, along with the reasons why, according to Macquarie.
- US Natural Gas – Production, demand and weather are all bullish drivers.
- Zinc – The only metal with a strong raw material-constraint story.
- Gold – We are not dollar bulls, and inflation may re-emerge quickly.
- Silver – Industrial demand is no longer getting worse, and mine supply is struggling.
- Nickel – A consistent deficit expected, and supply problems could amplify the impact.
- Chrome – A lack of South African supply growth is a conspicuous problem.
For those looking for a shorter time horizon, the bank believes that Nitrogen, Alumina, Nickel and Cobalt have “upside through to year-end”.
While there a lot of commodities that Macquarie is warming to, there are some markets that the bank remains cool on.
It believes that potash, alumina, aluminium, steel and LNG are “commodities for which the longer-term challenges are underappreciated”.
That sounds like a nice way of saying avoided.