Commodities bulls betting on a revival in Chinese demand will be hoping for more visible policy support as prices retreat in the world’s biggest buyer of raw materials.
Faltering imports and a prolonged property market slump have been compounded by a plunge in consumer prices, which have joined factory-gate prices in succumbing to deflation. Although the government said the drop will be temporary, it nevertheless presents another worrying signal for commodities and makes efforts to stimulate the economy ever more urgent.
China’s lapse into deflation is likely to affect sentiment in materials markets, but it will take a few months to feed into real demand, according to Amelia Xiao Fu, head of commodities strategy at BOCI Global Commodities UK Ltd. That could ultimately affect base metals like copper that are widely used in the production of consumer goods.
In the meantime, consumers’ aversion to spending puts more pressure on the state to boost demand. Beijing has signaled it will do so but details so far have been piecemeal and the authorities are less likely to sanction direct spending on big-ticket items like infrastructure at a time when local government finances are so precarious.
Commodities producers will want to avoid a prolonged period of deflation that prompts households to defer purchases of goods like jewelry, appliances and autos. The trick will be to prevent deflationary pressures getting baked into the economy using more targeted stimulus that doesn’t create its own set of risks.
UBS AG said it “remains cautious on the likelihood of a large stimulus package strongly lifting construction,” and instead expects the government to enact policies that gradually improve consumption. That would favor base metals and materials linked to the energy transition over bulk commodities like iron ore, according to a note from the bank.
Capital Economics Ltd. also expects “targeted stimulus in China to put a floor under base metals prices in the remainder of 2023,” the research firm said in a note.
The Week’s Diary
(All times Beijing unless noted.)
Wednesday, Aug. 9:
- China’s inflation data for July, 09:30
- China to release July aggregate financing & money supply by Aug. 15
- CCTD’s weekly online briefing on Chinese coal, 15:00
- Guangzhou Power Expo, day 2
Thursday, Aug. 10:
- Guangzhou Power Expo, day 3
Friday, Aug. 11:
- China’s monthly CASDE crop supply-demand report
- China weekly iron ore port stockpiles
- Shanghai exchange weekly commodities inventory, ~15:30
On the Wire
Country Garden, once China’s largest developer, made headlines again after missing a coupon payment on its dollar bonds as the years-long housing crisis shows no signs of ending.
Chinese EVs are now cheaper than gasoline cars.
--With assistance from Winnie Zhu and Martin Ritchie.