China’s economy has a major impact on commodity markets and China’s leaders are not afraid to throw their weight around. Right now, we’re witnessing an attempt by China to slow down the rise in commodity prices.
Chinese factory price index, released on April 8th, grew by 4.4% year-on-year, well ahead of economists’ estimates of a 3.6% rise (https://www.bloomberg.com/news/articles/2021-04-09/china-s-march-producer-prices-jump-most-in-more-than-two-years). The Cost of oil, copper, and agricultural commodities is leaking into producer prices.
The Financial Stability and Development Committee, led by the Chinese Vice Premier Liu He, reacted by calling for efforts to stabilize prices. A few days later, the Chinese Premier Li Keqiang added his weight behind the initiative. China will sell down some of their strategic stockpiles of copper, wheat, and aluminum. It will also increase the supply of coal, and is looking to tighten trading limits on Chinese commodity futures exchanges.
The proposed measures will have a short term impact but they will not fundamentally change the supply and demand mismatch for most commodities. The world economy, responding to fiscal and monetary stimulus ranging from ridiculous to ludicrous (depending on the country), is already starting to pick up steam despite continuing lockdowns and restrictions in most of the world. Newly printed money is burning a hole in consumers’ pockets; production of goods and services cannot keep up.
We may see a pause in commodity prices while the market digests the additional supply from Chinese stockpiles. But prices won’t peak until there are either more permanent supply additions (especially in metals and oil) or demand falls in a recession. Neither seems to be on the horizon.
Last week’s continuing trends:
- Japanese REITs
- Australian Equities
- Lean Hogs
- Communications Services
- Zinc
Last week’s reversing trends:
- Indian Rupee
- The Dollar Index
- London Cocoa
- Swedish Krona
- The Euro