China Seen Driving Commodities Lower as Uncertainty Spreads

September 1, 2015 08:43 AM

China will continue to hurt commodities in coming months as a volatile equity market and political uncertainty add to concern that economic growth is weakening, according to Citigroup Inc.

Demand for raw materials will weaken while a spillover from financial markets adds further pressure on prices, analysts including Ivan Szpakowski wrote in a report Tuesday subtitled "Riding the Chinese Rollercoaster." Corruption investigations have also crippled investment by some state companies, particularly power grid operators that support copper demand, according to the bank.

"China is driving commodity prices as never before, and it is driving them lower," the analysts wrote in the Sept. 1 report. "Commodity prices have been buffeted by volatile swings in Chinese equity and FX markets, and by concerns regarding underlying growth and policy response."

Raw materials including oil, iron ore and copper have tumbled on concern that demand is slowing from China, the world’s biggest consumer of energy, metals and grains. An official factory gauge for August slumped to a three-year low, data released Tuesday showed, stoking worry that the government’s stimulus efforts are insufficient.


Grid Spending

Political uncertainty, including the President Xi Jingping’s anti-corruption campaign, represents “the single largest risk” to commodity markets, Citigroup said. Investment in the country’s power grid, which is a major driver of copper demand, has stalled because of investigations into State Grid Corp. of China and China Southern Power Grid Corp., the analysts wrote. Spending on power infrastructure, as well as electricity cable and transformer production, are all down in the year through July, according to the bank.


The Bloomberg Commodity Index of 22 raw materials has lost more than 10 percent since China’s stock market started sliding off its peak on June. 12. Copper in London has lost 13 percent, while Brent crude has dropped 17 percent. The Shanghai Composite Index declined on Tuesday, extending the biggest two-month tumble since 2008.

“Volatility in the Chinese equity market continues to represent an important downside risk to commodities prices in the coming months,” Citigroup said in the report. Investors took bearish positions on commodity futures amid recent government restrictions on selling equities, the bank said.



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Spell Check

Tim Callaway Yale Economist
Yale , CT
9/2/2015 10:02 PM

  Because in China when they don't have money they don't eat. This will make the farmers in china go to towns and not farm this is a bullish condition not a bearish china is playing the USA we should get smarter


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