There has been much commentary pointing out low inventories for industrial commodities and the potential for a squeeze higher in prices. Inventories are indeed very low (as shown in the top left chart using LME warehouse data) but this seems to have been a persistent phenomena over the past few years. An alternative way to look at the inventory data is to view it as the percentage drawdown in inventories from peak levels. The top-right chart shows inventory drawdowns from 3-year highs, and at the moment inventories are down on average 65% from the highs. Historically such large levels of inventory drawdowns have been infrequent (green bars in chart), but they have not always led to a rally in prices. A pick up in demand is still needed. At present, the evidence of a demand pick up remains sparse given subdued Chinese data.

The bottom left chart shows Chinese M1 growth and our China Physical Economy proxy (steel/cement production etc), which are both flatlining at low levels. Our cyclical commodity regime indicator (last chart) still forecasts negative returns over the next 6 months. However, with synchronised global central bank easing, we slightly discount this negative message and maintain a neutral view overall on commodity prices.

(Click on image to enlarge)

Source: Bloomberg, Macrobond, Variant Perception