Amidst a prevailing backdrop of bearish sentiments for many commodity markets throughout this year, there has been an expectation of a resurgent Chinese economy to kickstart another demand cycle and boost prices. However, China’s latest economic indicators to be published cast doubt upon the realization of this much-anticipated revival. In this week’s article, we will look at this latest round of data, the current implications on commodity prices and how this situation may develop in the near future.
Deflationary Pressure
The statistic which is dominating headlines regarding China is that the country recorded a year-on-year drop of 0.4% for CPI in July, and in doing so became the first G20 nation to enter a period of deflation since Japan in February 2021. Simultaneously, the Producer Price Index (PPI) “declined for a 10th consecutive month, down 4.4% and faster than the forecast 4.1% fall”, according to Reuters. While most major economies around the world have spent the past year battling high inflation through interest rate increases, China has meanwhile struggled to reestablish the growth rate which had been an established part of the nation’s economic identity for the past few decades.
It is worth noting, as reported by Reuters, that there are some underlying factors to the CPI headline which provide mitigating context. Core inflation, a measure which excludes food and fuel prices, actually rose by 0.8% year-on-year in July. Furthermore, domestic pork prices in China have declined by over 25% over the past 12 months due to increased supplies and weakened demand.
Elsewhere, however, there are signs that the pillars of economic growth remain unsteady. One of China’s biggest property developers, Country Garden, recently scrapped plans to inject more money into the company and soon after missed two interest payments on bonds, as reported by the NY Times. The company’s value has halved this year, and given the significant role of the property sector in driving Chinese economic growth and indeed industrial commodity markets in previous years, this news will weaken confidence in the already-ailing sector. It is, of course, less than 2 years since the financial turmoil of Evergrande caused shockwaves through both the domestic and global economy.
ChAI’s Seaborne Imports and Exports drivers for Steel prices, showing several bearish indicators for Chinese trade.
Trade Stagnates
An area of China’s economy that has particularly suffered is trade, with both imports and exports falling in July. As reported by Reuters, imports fell by 12.4% in July year-on-year and exports declined by 14.5% over the same period; China’s trade data has not fallen at such a rate since the Covid pandemic.
China is the largest global importer of iron ore, copper and crude oil and the effect of declining imports and exports can be seen in the trade data for these commodities. Copper imports in July were down over 2% against June and have fallen by over 10% since the start of the year. Within ChAI, the drop in imports of copper sulphate has been picked up as a key bearish driver for the red metal’s price over the next year. Elsewhere, iron ore imports fell to a 3-month low of 93.5 million tonnes in July, which was again over 2% lower than June.
In crude oil markets, the picture is slightly different. For much of the past 12 months, China has been purchasing discounted Russian crude, taking advantage of the market opportunity created by western sanctions on Moscow. As a result, July’s decline in crude oil imports of over 10 million barrels per day versus June should be considered in the context of significant import volumes in the first half of the year; indeed, June’s import figures were the second highest on record. While crude oil stocks within China may be plentiful, an almost 19% month-on-month decline in imports nonetheless indicates that demand is not accelerating as many expected it would in the latter half of this year.
It is also important to note that the wider global economic downturn of the past year has contributed to China’s economic slowdown. PMI numbers have fallen below 50 in the US and even below 40 in Germany, showing the extent to which industrial production is struggling around the world. Furthermore, the destinations for many goods produced in China are western nations, but the environment of high inflation and rising interest rates has reduced consumer demand, and therefore impacted Chinese production and raw material demand.
Going forward, markets will be closely watching for concrete stimulus plans from the Chinese government to kickstart industrial activity once more. However, it was barely 12 months ago that Beijing injected $44 billion into the economy to achieve the very same aim and yet failed to achieve the desired effect. While markets may jump on when news breaks, the data will be key for monitoring the efficacy of any stimulus attempts over the long term.
By ChAI Predict
