Nothing quiet shows the trials and tribulations of global commodity prices over the past 12 months than the table below, supplied by Macquarie Capital’s commodity research team.
It’s fairly self explanatory, looking at the quarterly price movements for a wide variety of commodity markets. If there’s a common theme, it’s that there was plenty of severe declines recorded in the second half of 2015, emboldened in red, with that trend reversing in the June quarter of 2016, led by steel and crude markets.
As has been well documented in recent months, Macquarie suggest that Chinese demand played a significant role in the turnaround, with the government reverting to what they do best — boosting fixed asset infrastructure investment — to avert a sharp slowdown in economic activity that roiled broader financial markets at the beginning of the year.
The weakness in the Chinese economy coming into the end of last year meant a return to worrying about supporting the lower growth threshold. And to do this, they knew exactly what sort of medicine the economy liked – fixed asset investment. Helped by a liquidity push through SOEs and local governments in Q1, FAI in infrastructure retained its strength (most notably in areas such as power grid spending), while FAI in real estate returned to positive territory.
Though China, as the largest source of global demand for most commodity markets, played a leading role, Macquarie believe that the recovery in prices was part of a global industrial recovery
“We can say with increasing confidence that the industrial sector globally is in an upswing after flirting with recession at the end of 2016,” says Macquarie. “While it remains modest, especially by comparison to how the sector was doing before the GFC, this is a positive development for commodities demand.”
Adding to optimism, Macquarie suggest that other headwinds for metals and bulk commodities, such as USD strength and oil prices, appear to dissipating.
“This is particularly true of the oil recovery through Q2, which we believe will help to stall the multi-year cost deflation cycle as we move through H2 2016,” it says.
Not everyone will agree, many remain pessimistic. Like the catalyst for the recovery earlier this year, much will depend on China, and how-long its stimulus-led investment splurge persists.