'Choppy trade may continue in industrial commodities in near future but swift demand recovery from China likely to trigger fresh rallies'

© Pratik Bhakta ‘Choppy trade may continue in industrial commodities in near future but swift demand recovery from China likely to trigger fresh rallies’

Fragile economic releases from China, a surge in new virus cases across the world, and a strong US greenback cast doubt on the bullish outlook of industrial commodities.

The recent correction in base metals and energy commodities was primarily due to the China demand woes. Though, China’s economy had rebounded to its pre-pandemic growth levels, as business grapples with higher cost and supply bottlenecks is losing its steam. A surge in new virus infections led to fresh restrictions, disrupting the factory and industrial output, which has already been hit by severe weather this summer.

Extreme weather and a fresh outbreak of Covid-19 swept across the country made China’s economy slowed more than expected in recent months. Monthly economic numbers like factory activity, retail sales, export, and investment data all showed growth retreating more quickly than expected.

China’s industrial production numbers increased to 6.4 percent in July against a forecast of 7.8 percent. The reading was 8.3 percent in June. Retail sales figures too contracted lower to an increase of 8.5 percent in July against a forecast of 11.5 percent. Economists and research firms had already started lowering their expectations of China’s economic growth.

Expectations over China’s economic growth have already been started lowering by economists and research firms. Large investment banks like Goldman Sachs and Morgan Stanley had reduced their GDP forecast of China to around 8.2 or 8.3 percent from a previous estimate ranging from 8.6-8.9 percent. Few others are set to follow suit due to increasing pessimism about China’s economic outlook. China’s economy grew 12.7 percent during the first half of 2021 against the same period a year earlier.

China is the largest consumer of many industrial commodities like base metals and fuel. The broad-based slowdown in industrial activities suggests that their economy is rapidly losing momentum prompting investors to reduce their bullish bet on industrial commodities.

During the first half of the year, most of the widely used industrial commodities have got a boost from rapidly tightening physical markets and optimism over a quick global economic turnaround from the pandemic-led demand worries. Increased demand is driven by a swift global economic recovery that has raised concerns over a historic deficit in base metals supplies. The post-pandemic demand reinforced speculation about a new commodity super cycle as well.

However, commodities like base metals and energy lost momentum recently primarily due to demand concerns from China. In the base metals complex, the largest used industrial metal Copper shed to a near four-month low. Likewise, selling pressure was witnessed in Nickel and Lead. In the energy segment, NYMEX crude oil plunged considerably due to the weak demand picture in Asia and hopes of a rise in global supply. Contradictory, Aluminium prices traded higher due to government policies and output limits imposed by big Chinese companies.

A stronger US currency is also putting pressure on commodity prices. When US currency strengthens it makes commodity prices more expensive to the holders of non-dollar currencies. This tends to have a negative impact on demand and on prices. The Dollar index, which is measured against a basket of six major currencies, jumped to a nine-month high last week on optimism over the US economy.

Anyhow, the ongoing choppy trading may continue in near future but a swift demand recovery from China is likely to trigger fresh rallies.

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