January 2023 - State of The Commodity Market

Our commodity related macro framework for the month - All the macro fundamentals that investors with commodity exposure need to know

Commodity supercycles never move in a straight line; instead, they are a sequence of price spikes, with each high and low higher than the previous spike. Commodity prices, unlike financial markets, perform an economic function of balancing supply and demand, so once high prices have rebalanced the market in the short term, the high prices are no longer needed, and prices come crashing back down as we witnessed late this year. But ending one spike doesn’t mean the end of the supercycle - long-run supply issues take years to resolve.

I believe that the long term CAPEX cycle will lead this cyclical commodity bull market higher again. Moreover we have the tools to time certain setups, which gives us a big advantage.

The key development to watch in 2023 is whether we will see a new CAPEX cycle begin to take root. This requires capital and only better relative returns will attract capital. With the drop in the valuation of the new economy and the rise in commodity prices, we are getting close to this rotation of capital.

Here is why: