Chart of the Week - Commodity Capex
Critically important theme locked-in and now coming into play...
Chart of the Week - Commodity Supercycling
Commodity Capex Depression = New Bull Market: In early 2022 I turned bearish on commodities as the cyclical bear market kicked off (at that time we had a situation of stretched valuations, crowded longs and consensus bullishness, deteriorating macro/demand outlook, and a number of technical risk flags waving).
One thing I noted back then was that the post-2000’s commodity supercycle capex depression would most likely result in a higher floor for commodity prices once that cyclical bear ran its course.
I believe this is precisely what is in play right now.
Despite the previous run up in commodity prices, across global listed commodity producers we have only seen a slight and delayed uptick in capex (i.e. investment in supply). And across all major segments of commodities the pace of capex remains below long-term average.
But the thing I think we need to focus on is just how long and how deep the commodity capex depression was — during the 2016-2023 period we saw massive underinvestment. Part of this was indeed due to the impact of the 2015/16 commodity crash and really overall what could be described as a decade-long bear market in commodities from the peak in 2011 to the trough in 2020.
Other factors like the rise of ESG investing curtailing the flow of funds to commodity producers, and the rise-and-rise of tech funneling funds to other opportunities, no doubt also contributed.
But the main point I wanted to highlight is that a lot of the conditions that prevailed in early-2022 which made the bear case clear and compelling have now either switched to outright bullish or simply run their course.
In other words, in my opinion we have reached the aforementioned higher floor in commodity prices, and a new cyclical bull market in commodities is getting underway.
Key point: An 8-year commodity capex depression is set to have an enduring impact.
n.b. Check out the full archives of the Chart Of The Week for more charts.
Aside from the Chart Of The Week, this email gives you a brief overview of what was covered in our latest Weekly Insights Report (this email provides a free preview of the Topdown Charts premium service on Substack).
Topics covered in the latest Weekly Insights Report
Aside from the chart above, we looked at a bunch of other charts across some important and interesting macro/asset allocation issues:
Market Update: key developments across stocks, bonds, FX, commodities
Small Caps: big problems for small caps, but still a contrarian bull case..
Inflation Pulse: checking in on the risk outlook and trend in inflation globally
Commodities: things are changing here — major update to the outlook
Capex megatrends: reshoring, infrastructure, war, space, climate, commodities
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