No China, No Honey

By /

Andreas Anastasiadis

With the Russia-Ukraine war and conflicts in the Middle East persisting alongside OPEC’s implemented production cuts, it’s reasonable to expect that commodity prices would hover close to historic peaks; this should be the case especially for energy and metals. In reality, WTI is trading -11.8% below highs (Figure 1) since Hamas attacked Israel and drumbeats of war were heard. Furthermore, copper and silver prices are relatively flat on a YTD basis (Figures 2 and 3). While we should have been expecting higher commodity prices given the geopolitical environment, there are forces that are keeping them down, with one important one being China.

Figure 1: WTI crude oil futures, current month contract
Figure 2: COMEX copper futures, current month contract
Figure 3: COMEX silver futures, current month contract

For oil, part of the explanation is attributed to surging US crude oil production after mid-January (Figure 4), partially offsetting OPEC’s cuts. However, the primary factor behind the lack of a commodity rally can be succinctly summarized in one word: China. China stands as the globe’s largest consumer of raw materials, importing approximately 40% of industrial metals worldwide and 10% of global crude oil. Many commodity producers had anticipated stronger growth in China’s economy, only to find it hasn’t materialized as expected. In the previous year, China saw a 5.2% annual growth rate, which may appear favorable at first glance. However, it’s important to recall that this growth figure is relative to 2022, a year marked by extensive lockdown measures across China. China’s economy has grappled with substantial debt, plummeting real estate values, sluggish industrial output and consumer expenditure, and a significant decline in imports and exports. These factors have reverberated throughout commodity markets, typically mirroring China’s growth trajectory with a lag of around one year.

Figure 4: US crude oil production, thousand Bpd

Nevertheless, the recent Chinese stimulus actions provide an additional favorable tailwind for improved US crude oil exports. Moreover, copper and silver futures anticipate a hike after China’s decision to cut its reserve ratio, but additional measures need to be taken to create a new bull market in the industrial metal sector.