A recent report from Macquarie Looking forward to an upcycle in commodities, outlines the bank’s thesis has to why a bull market in commodities began in April 2020 is built on a wave of government spending that will drive up demand over the next 1-3 years.
“In the last mini-upcycle the CRB Raw Industrials (CRBRI), a broad index of commodity prices rose 33% over 2.6 years. This is similar to the mini-upcycles we saw in the 1980’s and 1990’s. If we are right that an upcycle has started, we could see the CRBRI rise over 20-50% over the next 1-3 years.”
“In our view, the two drivers of a mini up-cycle in commodities would be: i) the recovery in global activity from the Covid-19 shutdowns; and ii) a mix shift to a more government led economy for a period of time as public investment increases in response to weaker private demand.
We think a shift towards government investment will drive more commodity intensive economic growth. As governments around the world spend more on infrastructure investment, this will increase demand for metals and other raw materials needed to build that infrastructure.
The reduction in interest rates around the world is also likely to drive demand for home building and autos, which are both relatively commodity intensive. Housing is also likely to benefit from fiscal subsidies in order to support construction jobs.
The broad measure of commodity prices we use is the CRB Raw Industrials (CRBRI). This index has declined by 23% in the current mini-downcycle that started in April 2018. This is slightly less than the last mini-downcycle (May 2014 to Dec 2015) where the index fell 26%. While the index could fall further, we think downside is limited as industrial activity is recovering from the shutdowns.
