Home Commodities Commodities roller coaster continues – Deutsche Bank

Commodities roller coaster continues – Deutsche Bank

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As flow has previously noted, China’s status as the world’s second-biggest growth engine means that its economic health has almost as great a bearing as the US on the course of commodity prices, particularly metals.

Deutsche Bank Research’s analysts report that demand has weakened since mid-2021 primarily due to a downturn in the Chinese property market, despite government policy shifting last December to a more supportive, pro-growth setting. Subsequent zero-Covid lockdowns stifled a nascent recovery in activity. “The housing recovery has been slower than expected: recent data shows a rebound in sales from April lows, although a sustained recovery in construction activity may not come through until late 2022 or 2023,” notes the Industry Update.

On 14 July 2022, in the news story headed, ‘China property crisis enters next dangerous phase’2, Reuters summarised the current precarious position of homebuyers refusing to meet mortgage payments for homes not yet finished by developers. “New launches are almost always sold before they are built. When heavily indebted developers run out of cash, buyers are left with nothing but a debt obligation,” observes Thomson Reuters’ Yawen Chen.

An earlier Reuters report (5 July) noted that it had heard reports that China is setting up a state infrastructure investment fund worth 500 billion yuan (US$74.69bn) “to spur infrastructure spending and revive a flagging economy”.3

This demand for construction commodities is likely to see a “relief rally”, forecasts the Deutsche Bank Research team, with commodity prices temporarily buoyed by China’s rebound before they “succumb to weaker global growth and some degree of supply recovery across the complex, reaching a trough around the middle of 2023”.

This scenario is reflected in the outlook for copper, where prices have been in retreat since March although escalating geopolitical tensions and copper output in major producers Chile and Peru is 4.5% lower year-on-year in the first five months of 2022.

With China’s “tepid activity” now reviving, a brief stimulus for copper is expected in Q4 before slowing demand elsewhere in the world and output from new mines such as Chile’s QB2, Peru’s Quellaveco and Kamoa-Kakula Phase 2 in the Democratic Republic of Congo create a supply surplus and bear downwards on prices in 2023.

A deeper recession than anticipated could create an even bigger surplus, but the team believes that “the relatively low level of global inventories, coupled with accelerating investments into renewables and electric vehicles (EVs), should limit the downside” making it less pronounced than previous downturns, such as 2015-16. As early as 2025, a surplus of copper could be replaced by “sustained deficits”.

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