In recent months, investors have turned their attention to one of the largest commodity consumers in the world: China. Many attribute the most recent commodity supercycle as a byproduct of China’s emergence. Subsequently, analysts have pointed to China’s slowdown as one of the biggest contributing factors to the market’s recent decline [for more commodity news and analysis subscribe to our free newsletter].
Though China’s economy is still growing, the country is nowhere near the double-digit growth figures it once enjoyed. Analysts estimate China’s economy will grow 7.5% this year - the lowest GDP growth rate in over a decade. Already, commodity traders are seeing the impact of the nation’s slowdown.
Key Commodities Struggle
Industrial commodities have been the hardest hit by China’s slowdown. Prices for copper, iron ore, aluminum, lead, zinc, and coal have declined in recent weeks. Iron ore and copper are considered to be barometers of the Chinese economy, the world’s top consumer of both. Currently, China’s consumption represents 66% of global demand for iron ore, and 44% for copper.
Copper futures (May 2014 contract) have tumbled in March, falling more than 6.5% in only 8 days. On Tuesday of this week, the metal plummeted to its lowest level since June 2010. Year-to-date, copper is down roughly 12% [see A Deeper Look At China's Commodity Industry].
Iron ore prices have also declined, falling over 8% over the trailing one-week period. Consequently several mining companies, like BHP Biliton (BHP), have also declined.
Not all commodities tied to China, however, have declined. Soybeans, for example, have risen to five-month highs; currently China’s share of global demand is roughly 44%. Data also shows that China demand for soybeans is on the rise.
The Bottom Line
While China’s economic outlook remains dismal, the full impact of the slowdown on commodities will take some time to fully realize. Investors must also realize that there are a slew of drivers that could help buoy (or sink) commodities once again.
Disclosure: No positions at time of writing.