As China’s economy continues to experience a downturn, the global commodities market is facing its biggest threat yet. Economic activity and credit flows in the world’s top buyer have deteriorated sharply, causing Beijing’s modest growth targets to be at risk. While commodities have held up relatively well compared to other assets, challenges such as a protracted crisis in the property market, deflation, weak exports, and a falling yuan still remain. In this blog post, we will delve deeper into the impact of China’s stuttering economy on commodities, specifically base metals, iron & steel, crude oil, coal & gas, and pork.
Base Metals:
Base metals have retreated from their January high as China’s economy has lost steam, leading to a decline in smelters and fabricators’ margins. This drop in profitability in the first half marks their worst performance in over a decade. The fierce competition and price wars in certain segments have contributed to this decline. However, there is a silver lining as inventories of copper and aluminum have decreased, with stockpiles of copper nearing critical levels. The growth of clean energy sectors has supported the demand for these metals, providing a glimmer of hope.
Iron & Steel:
With construction accounting for a significant portion of China’s steel demand, the state of the property market plays a crucial role. Iron ore, the main input for blast furnaces, has remained above $100 a ton due to bets on stimulus. However, concerns about increasing local government debt have diminished the possibility of another major splurge on public works. Although seasonal demand is picking up, steelmakers remain cautious about tapping into more imports to replenish supplies. Despite the uncertain outlook, there is potential for a sudden recovery in downstream steel demand.
Crude Oil:
Crude oil shipments stood out as a bright spot among China’s commodities imports in the first half of the year. It is expected that China’s demand growth will account for 40% of the global total. However, the recovery may be losing steam as refiners reduce imports and focus on depleting inventories instead. Domestic demand for oil products has slowed, and China’s exports of diesel have surpassed its domestic consumption, while gasoline demand faces challenges from the rise in electric vehicle adoption. The petrochemicals sector has also witnessed rare declines in sales and profits, heavily influenced by the property market’s health.
Coal & Gas:
Coal remains China’s mainstay fuel, driving its economic activity. However, Beijing’s efforts to boost both coal output and imports have resulted in a surplus that has left prices stagnant. With the passing of peak summer cooling needs and the potential for gloomy industrial indicators, power plants may choose to offload their coal inventories, further pressuring the market. The breakneck pace of inbound shipments is likely to slow down, and purchases of liquefied natural gas (LNG) are expected to decrease as coal remains abundant. Furthermore, the depreciation of the yuan adds another challenge for buyers in a market heavily dependent on dollar-denominated commodities.
Pork:
Despite the reopening of the economy after strict pandemic control measures, the anticipated surge in pork consumption did not materialize. Economic uncertainties led households to conserve cash, impacting the wider economy. Pork prices hold significant weight in the basket of food prices, contributing to consumer deflation in July. Pig farmers have faced losses, and the pork market is currently in surplus. The upcoming festival season will serve as a crucial test of the public’s inclination towards discretionary spending on pricier food items.
China’s stuttering economy poses a significant threat to global commodities demand. While commodities have held up better than other assets thus far, various challenges continue to loom, including the property market crisis, weak exports, falling yuan, and deflationary pressures. Nevertheless, the growth of clean energy sectors offers some respite, particularly in terms of copper consumption. As we navigate through these uncertain times, it is crucial to remain vigilant and monitor how China’s economic struggles impact the global commodities market.
Market Capital Research 