The slowdown in the Chinese economy threatens commodity markets

By Rhod Mackenzie

More and more Western economists cite the Chinese economy as the main threat to global demand for raw materials, which has sharply slowed growth and recovery after the lifting of coronavirus restrictions. Economic activity and credit flows in the Celestial Empire have fallen sharply, the goals for economic growth this year are in question.

Raw materials against this gloomy background have so far “held” better than other assets. After the end of zero tolerance for the coronavirus, energy consumption has increased. Until recently, markets have also supported hopes that Beijing will help the economy to accelerate, as well as seasonal growth in demand. However, in general, these hopes are not yet justified, according to Bloomberg. According to the tradition that has already become in the last couple of years, the real estate market and the construction sector, which gives a quarter of the country's GDP and affects the "health" of the entire economy of the Middle Kingdom, is in a particularly difficult condition. To top it all off, deflation has come to China, and the yuan is falling along with exports.

So far, the structural changes associated with the transition from an economic growth model based on investment to a model in which economic growth is driven by increased consumption are not working very well. The new model generally promotes healthy demand, but besides the positives - the growth in demand for energy and food, it also has disadvantages - it does not help, for example, the growth in demand for metals.

A significant increase in clean energy spending is boosting demand for metals, but only for those involved in the green transition. For example, for copper.

Demand for base metals, which was quite strong last year, has fallen this year along with the slowdown in the economy. Moreover, the fall in the first half of the year was the strongest in a decade. At the same time, according to Goldman Sachs, stocks of the most "popular" metals - copper and aluminum - also decreased. Moreover, for copper to a critical level.

Since up to 40% of demand in China for steel was provided by the construction sector, the protracted crisis in it had a negative impact on demand for steel. Now metallurgists are waiting for a new increase in demand, which may result in a sharp increase in infrastructure projects.

Now begins the "golden" months for activity in the construction sector. Previously, these were hot days for metallurgists. But steel companies understand that it is not worth counting on a recovery in demand for steel given the ongoing problems in the construction industry.

Things were relatively good in the first half of the year with oil. Economists believe that the growth in demand for oil in China will provide up to 40% of global demand for "black gold".

Lower refinery inventories could further boost oil demand, which fell to a three-month low in July. Demand for oil products abroad still exceeds the demand for them in the domestic market. Suffice it to say that Chinese diesel exports tripled in July compared to June. In China itself, diesel demand is being held back by a slowdown in industrial activity, while gasoline demand is being held back by the rising popularity of electric vehicles.

Unexpectedly, sales of the petrochemical industry dropped. In particular, plastics and rubber, the demand for which is highly dependent on the situation in the construction sector.

Now, at the end of summer, the demand for electricity, a large proportion of which in the summer falls on the operation of air conditioners, is starting to decline.

Failed to recover after the lifting of coronavirus restrictions and the market of the main food product of the Chinese - pork. Amid uncertainty about the economy, households have begun to save and spend less money on food, including, of course, pork.

Pork is so popular in China that problems in the pork market mean problems for many other industries. Pork also has a strong impact on the cost of the Chinese food basket. She played a big role in the consumer deflation that began in July.

2023 will be a difficult year for pork producers. Most manufacturers will incur losses at the end of the year. The pork market is currently overstocked. The next test of the "appetite" of the Chinese will be the so-called festive season, which will begin in October with the Day of the founding of China and end with the Chinese New Year.