Commodities Slump on China’s Economic Headwinds

Commodity prices fell 9% amid China’s economic woes weighing on demand, including COVID-19 and problems in the property sector. Crude oil prices fell sharply. Despite the positive long-term outlook, short-term risks remain.

Commodity prices have fallen sharply in recent weeks amid concerns about slowing economic growth in China, according to CME Group. The Bloomberg Commodity Spot Index, which tracks the prices of 23 commodities, is down more than 9% since mid-April.

Chinese influence

Much of the decline was due to concerns about weakening demand in China, the world’s largest importer of raw materials. As China’s economy slows under pressure from outbreaks of COVID-19 and a struggling property market, demand for commodities such as copper, iron ore and crude oil is expected to ease. This put significant pressure on global commodity prices.

“China accounts for over 50% of global demand for major commodities such as copper, steel and coal,” said Michael Smith, commodities strategist at ABC Bank. “Any hiccup in China’s economy will have a huge impact on commodity markets.”

In April, China’s manufacturing PMI fell to 47.4, indicating a contraction in factory activity amid strict lockdowns. This raised concerns about demand for manufactured goods in the short term. Shanghai, China’s main commercial hub, has been under a strict COVID-19 lockdown since late March.

Ease of supply care

At the same time, concerns about tight supplies have recently eased. Fears of major disruptions to goods exports from Russia have eased somewhat. Although Russia is a key supplier of oil, gas, metals and crops, sanctions have so far avoided directly targeting these flows.

“Commodity markets were initially spooked by the potential for Russian supply shortages, but those worst-case scenarios have so far failed to materialize,” said Jane Wells, commodity analyst at XYZ Capital.

The easing of supply constraints has shifted the focus back to demand-side risks. As China’s economy loses momentum, the balance of risks has turned lower for commodities.

The oil hit hard

Crude oil has been among the worst-hit commodities, with Brent prices down more than 15% from peaks in March to around $100 a barrel. Demand from China and the prospect of more supplies from Iran are putting pressure on prices.

“Oil markets face the twin headwinds of China’s weakness and the potential Iran nuclear deal,” Wells said. “Without the geopolitical risk premium from Ukraine, oil looks overvalued at $100 and has room for further declines.”

Agricultural commodities such as wheat and corn also declined due to an improved supply outlook. In addition, the strong US dollar has made goods less available to buyers with other currencies.

The recent pullback does not alter the longer-term bullish position for commodities amid still tight supplies and resilient demand. However, China’s faltering economy poses a near-term risk that could lead to further volatility and price declines.

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