As mentioned, much of the slowing growth focus has so been directed at China, the world’s biggest importer and consumer of raw materials, especially after an initial and failed attempt in late March to prevent the virus from spreading from parts of Shanghai. Six weeks later and the Covid outbreaks in China and restrictions intended to contain them have indirectly added to operating costs, making it tougher for factories to maintain production, obtain raw materials and ship out finished goods.
Industrial metals, the most China-centric commodity sector has suffered the most from these developments with the Bloomberg Industrial Metals index having fallen by close to 25% since the March 7 record peak. Other sectors like precious metals (-12%), energy (-10%), grains (-5%) and softs (-6%) have seen smaller declines from their recent peaks. With the industrial metal sector having almost reversed back to levels seen at the start of the year, the question remains what may support an eventual floor under the market. The simple answer is China.
China’s current situation was recently described by a major investor in Hong Kong as the worst in 30 years with Beijing’s increasingly fraught zero-Covid policies slowing growth while raising discontent among the population. As a result, global supply chains continue to be challenged with congestions at Chinese ports building, while demand for key commodities from crude oil to industrial metals have seen a clear drop. One of the consequences being the need for the government to launch a major stimulus drive to support a recovery in growth, currently well below the 5.5% target. Such initiatives are likely to support the industrial metal sector given the focus on infrastructure and energy transition, hence our view that following the recent weakness a floor is not far away.