As you well know, the main cause of the commodities meltdown has been China’s slowdown. Since China makes up half of the world’s demand for commodities, the economic slowdown means lower demand which has led to a situation where a glut of materials can’t find a home.
The role that China plays in commodity prices is so big that the future of metal prices is totally dependent on China. The longer it takes China to clean up this mess, the later metal prices will hit bottom. Currently, some key Chinese indicators we are tracking are giving us no reason to expect higher metal prices in 2016.
Trade Surplus
Imports to China dropped 8.7% to $143.14 billion in November from a year earlier, extending a slump in imports to a record 13 months, suggesting that government stimulus measures are failing to boost growth.
China Imports (millions $) Source: trading economics.com. Source: TradingEconomics.com from Customs Administration Data.
Meanwhile, Chinese exports declined 6.8% to $197.24 billion in November from a year earlier, marking the fifth straight falling month. The fact that China is struggling to increase its exports demonstrates that global demand is weak and that China will have to find a more painful solution to balance its surplus. The trade surplus and the inability to find a home for the excess of materials flow will continue to keep a lid in China’s growth, depressing commodity prices.
China Exports (millions of dollars). Source: TradingEconomics.com
Yuan Falls To Four-Year Low Against The Dollar
China’s authorities want to see a smooth depreciation of the yuan/renminbi as China faces external pressure no to devaluate its currency too quickly. A sharp depreciation would probably hurt the country’s credibility at the same time China wants to attract more foreign capital. In addition, it would raise criticisms that China is keeping its currency artificially low to encourage more exports.
Yuan versus dollar. Source: Yahoo (O:YHOO) Finance.
Recently, China’s central bank cut its reference rate to the lowest level since 2011. The yuan fell against the dollar to the lowest level since 2011. Although China has said that it has not allowed the yuan to slide to boost the economy or increase exports, it seems that the market is taking these developments as desperate actions from China’s government to help the economy, raising concerns among investors that the country’s slowdown might worsen.
China’s Equity Markets’ Slump Continues
We believe that equity markets are best benchmark for the performance of China’s economy, or at least investors’ sentiment about China. We’ve analyzed before the link between China’s stock market and commodity prices. Currently, this link is even more noticeable.
China FXI shares continue to fall. Source: @StockCharts.com.
After the huge slump this summer, equity prices mildly recovered, but since October we see that equities are heading south again. The poor performance of Chinese stocks demonstrates that investors are still worried about the future of the country and not lured by its government actions.
Contrary to what others are saying, we suspect that the slump in China’s stock market could continue, resulting in more fears and more sell-offs in commodities/metals markets.