China Plays Havoc With Commodity Prices

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China Plays Havoc With Commodity Prices
China Plays Havoc With Commodity Prices

China Plays Havoc With Commodity Prices

The scale and therefore significance of China among global economies has always been accepted. But sometimes we become complacent. The abrupt slowdown in the world’s second largest economy is serving as a stark reminder of the influence China has gained over the last 20 years.

Two decades ago the world was a different place, global economics played by a defined set of rules. Today’s configuration of world economic powers means that economics of old are a thing of the past. The rulebook has been re-written and nothing good will come to investors who fail to acknowledge this fact.
Commodities are a prime example of how the fundamental changes in world demand have placed a heightened significance on the happenings within the Chinese economy.

Take Oil for example. A milder US long-range weather forecast should reduce demand for this energy commodity. This perhaps would be offset by a slight uptick in US economic activity. So far, status quo. Now introduce the geopolitical situation in the Ukraine. The fact that Russia is one of the world’s largest Oil providers. The fact that an important portion of European Oil supplies are routed through the Ukrainian region. The fact that Washington is threatening to introduce trade sanctions against Russia. And yet Oil prices have been falling. The threat of a drop off in Chinese demand has the market more spooked than a potential re-ignition of the cold war.

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Now look at Copper. Natural demand for this Industrial Metal should have gradually decreased over the past 20 years. We now longer use as much of it in coinage, and certainly the proliferation of fiber optic and wireless technologies would dampen the need for this metal as a raw material. Except that the power of China’s manufacturing engine has drastically increased the supply of end consumer goods, many of which contain Copper. So when Chinese output slows, for whatever reason, the drop off in raw material demand is palpable.

The effect China is having on Copper prices is compounded by the fact that Chinese corporations are in the practice of using Industrial Metals as loan collateral. Credit is predicted to contract by up to 20% in China this year, less lending requires less collateral, which in turn will release a significant quantity of Copper, and other Industrial Metals, back onto the open market, thus further suppressing prices.

To contact the reporter of this story: James Brennan at james@forexminute.com