Invesco chief economit, John Greenwood, agrees that China is in need of an extended period of de-leveraging “which seems almost certain to undermine their growth rates going forward, thus keeping commodity prices subdued”.
According to Greenwood, three factors in particular have been behind the rise in commodity prices seen so far this year: stronger growth in Asia outside of China; some reduction in supply; and the fading of the effects of the strong US dollar. But, he says a positive outlook from here is “by no means guaranteed”.
“Given that the fundamentals for most industrial commodities have not improved, the recovery in commodity prices during the first half of 2016 seems destined to prove a false dawn for commodity prices. From a broader economic standpoint, low prices are a requirement to cut supply and reduce excess capacity across a range of commodities, and this adjustment is likely to take several years. Equally, in the absence of significant CPI inflation globally, both lower prices and reduced capacity will be required to raise commodity prices in the medium to long term.”
As it has been since the start of the supercycle, most investor views of the prospects for commodities are inextricably linked to the outlook for China. But, what has changed is the health of many of the companies involved.
While it is impossible to know how events in China will play out, while deleveraging needs to happen, it could very easily take a great deal longer to happen than the market predicts – China has often confounded even the most well informed market assumptions. And, should that be the case, commodities could well move higher from here and, if that is to happen many investors who have remained on the fence might be forced in by a weight of money. That said, it is equally plausible that it comes crashing down – either way, it looks like commodities could be a key call to make in 2017.
