Commentary: Global commodities swoon on weak China data

19 April 2013 09:17  [Source: ICB]

The worldwide commodities market swooned last week, with broad-based weakness across oil, gold, iron ore and copper. A weaker Q1 GDP growth number from China than expected of 7.7% triggered a mass exodus from commodities, as the second largest economy in the world is a huge consumer of raw materials to power its manufacturing engine and infrastructure growth.

We held a full day of discussions with the ICIS price reporting team in Shanghai and the story was consistent:

NYMEX Rex Features

Rex Features

Crude oil prices fell as China's GDP growth came up short

Government policy to rein in liquidity - most notably in the shape of new restrictions on the housing market - has driven demand down.

Traders expected a post-Chinese New Year demand bounce that has not happened.

Anxiety among producers and traders is growing over the long-term direction of the economic policies of China's new leaders.

In the toluene market, inventories on China's east coast are at 100,000 tonnes, compared with 30,000 tonnes in the second half of last year. This is the result of traders taking aggressive positions on the assumption that demand for toluene into paint would continue to boom. However, demand for paint has fallen because of the construction slowdown.

"The animal spirits have gone out of markets and there is a great deal of caution about, but demand is there and demand will continue to grow very well," a polyolefins industry source told the ICIS Asian Chemical Connections blog.

Major structural changes mean the problems extend way beyond just an absence of animal spirits - the speculation that added so much froth to markets in 2009-2010.

Some analysts, along with chemical executives, have yet to fully realise that the profound changes in China's economy mean lower growth over the long term.

Supporting our view was that the disappointing Q1 GDP data led to hopes of a new round of big fiscal stimulus. "The government is sure to do something significant to support growth in the second half of the year," a senior executive at a global aromatics producer told the blog.

But, as China premier Li Keqiang made clear in a speech on 14 April, any stimulus measures would not be introduced at the risk of causing more long-term damage. Economic rebalancing will include the ongoing frugality and anti-corruption campaigns. So too will efforts to rein in runaway bank lending.

  • Additional contribution from Joseph Chang in New York

By: John Richardson
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