This year’s Commodities research house of the year, Macquarie Group, delves into commodity market data to find underappreciated or overlooked measures, providing its clients with valuable and nuanced insights that enhance their understanding of the marketplace.
Over the past 18 months, Macquarie’s Commodities and Global Markets business has delivered its clients insights that have regularly been more accurate than the consensus view. Notable examples include: its less bullish stance on Chinese jet fuel demand; its more bullish stance on China’s overall commodity demand after its property crash; above-consensus expectations for post-Covid US oil growth; and its more bearish oil market view in 2023 compared with consensus views.
When it comes to Chinese jet fuel demand, the general expectation at the start of 2023 was for a sharp boost in demand as the country began relaxing its Covid restrictions and international travel resumed.
Vikas Dwivedi, Macquarie
“Going into 2023, China reopening was front and centre in commodity markets,” says Marcus Garvey, head of commodities strategy at Macquarie.
However, as Vikas Dwivedi, global energy strategist at Macquarie, explains: “Our team provided perspective that offered a more subdued view of growth potential in Chinese jet demand.”
Macquarie analysts used varied sources – including the International Energy Agency, the National Bureau of Statistics of China and global lobby group the International Air Transport Association – to work out the jet fuel demand split between domestic and international air travel. They concluded that, pre-Covid, the majority of Chinese jet fuel demand came from domestic travel, and that only a relatively small proportion came from international trips.
“This limited the upside potential in a recovery scenario,” says Dwivedi.
He notes that this analysis was not easy to conduct, but that the real-world outcome was close to their expectations: “The underlying logic of our analysis offered an important perspective into a fairly opaque demand source amidst high expectations.”
Similarly, Macquarie’s commodities strategy team provided clients with unique insights into the impact on commodities of China’s property collapse, which began in 2021 with the default of Chinese property developer Evergrande. With the property market accounting for around 25% of the country’s economic activity, the subsequent collapse of the industry fed into China’s banking and constructions sectors.
The situation looked dire from the outside, but Macquarie’s commodities strategy team was able to bring some much-needed nuance for its clients about the wider effects.
“Despite the widely reported collapse in China’s property market, construction-related demand for commodities had not fallen to anything like the same degree,” says Garvey.
“[We were able to provide a] clear insight into one of the world’s largest commodity consuming sectors, better enabling both corporate clients and investors to form fundamental and price expectations for related commodity markets.”
To do this, Macquarie’s on-the-ground team in China looked at a wide range of sources, including some broader measures of the nation’s construction activity that they believe many international market participants are unaware of or don’t consult frequently.
Overall, the team’s analysis indicated that construction-related commodity demand had not declined as much as headline property market data had suggested. Additionally, it had been offset by investment in other sectors, such as renewable energy generation construction.
Meanwhile, Macquarie’s research on US oil markets, which also involved delving into some little-used sources, resulted in the bank producing above-consensus expectations for US oil production growth in the post-Covid era.
Walt Chancellor, Macquarie
This analysis was bolstered by labour availability figures sourced from the US Bureau of Labor Statistics, among other independent data streams, says Macquarie energy strategist Walt Chancellor. While publicly available, this labour data is not widely used by other commodity market analysts, Chancellor believes.
“As oilfield labour availability has been viewed as an inhibitor to shale growth post-Covid, we have been highlighting oilfield labour activity since 2022,” he says. While lower rig-count data may have suggested falling production, rising labour data indicated output could be stronger than many expected.
“Specifically, we believe the labour data helps bridge the gap between lower observable rig counts and stronger US production data,” says Chancellor.
Adding an additional focus on labour data to rig counts and production data provided some rich nuance to the team’s oil market outlook. Dwivedi adds that the team’s US production views contributed to Macquarie’s less bullish overall oil market view in 2023 compared with consensus views.