Commodities from copper to corn have been tumbling as plentiful supplies and flagging Chinese demand prompt fund managers to cut around $41bn of bullish bets on natural resources.
The sell-off in copper, a bellwether of the global economy because of its wide-ranging uses in building, infrastructure and manufacturing, has been particularly stark — it is down close to 20 per cent from its record high in May above $11,000 per tonne.
Other base metals such as aluminium, lead and zinc have followed suit, while corn has dropped to its lowest level since October 2020.
The sell-off has been driven by traders unwinding their sizeable bets on prices rising as the outlook for growth in China — the biggest consumer of many commodities — has dimmed and the country’s authorities have failed to deliver the stimulus that investors had been hoping for.
“Investor selling pressure has been immense across copper and base metals as weak Chinese demand sentiment has been re-enforced by a lack of significant policy support in July,” said Tracey Allen, commodities strategist at JPMorgan.
Traders’ bullish positions — net of bearish bets — on commodities have dropped 31 per cent, or $41bn, from a late May peak of $132bn to July 30, according to data from JPMorgan.
The widespread sell-off marks a sharp reversal from just over two months ago when some commodities, including copper, reached record highs as investors poured in money and bearish traders were forced out of their bets. Many traders were also drawn to copper as a way of hedging against inflation, after US inflation in March rose faster than expected.
Although the threat of wider conflict in the Middle East following the killing of a Hamas political leader boosted the commodities sector on Wednesday — with copper rebounding 2.8 per cent to $9,225 per tonne — the overriding sentiment has soured as growth in China has disappointed, with prices falling again on Thursday.
China’s official manufacturing purchasing managers’ index, a measure of manufacturing activity, fell for a third consecutive month in July, the country’s National Bureau of Statistics said on Wednesday.
Meanwhile, much of the copper bought by China in the first half of this year ended up being stockpiled, rather than used.
“The [market] sentiment towards commodities is really bad,” said Sabrin Chowdhury, head of commodities analysis at BMI, a commodities data firm that is part of Fitch Group. The outlook “is definitely weak in the coming few months as the hopes pinned on China start to diminish completely”.
China’s Third Plenum — the Communist party’s flagship policy meeting, which takes place every five years — wrapped up in July without any announcements of major support for the country’s moribund property sector, as Beijing continues to double down on high-tech manufacturing.
“The plenum did not live up to expectations in terms of additional support for the economy,” said Ole Hansen, head of commodity strategy at Saxo Bank. “The short-term outlook is not looking good.”
Rio Tinto, the world’s second-largest miner, highlighted the depth of China’s property market slump on Wednesday when it said that steel demand from that sector was down by as much as 30 per cent from its peak in 2020.
“Prices were below the average of the last 10 years when adjusting for inflation” in the first six months of the year, said Peter Cunningham, chief financial officer at Rio Tinto, referring to its major products such as iron ore, aluminium and copper.
A firm US dollar — in which most commodities are priced — market gyrations in response to US presidential election uncertainty and weak economic growth in other parts of the world have all weighed on commodity prices, analysts said. A stock market fall in recent weeks has also led some fund managers to reduce their positions in other assets, said Saxo’s Hansen.
For agricultural commodities, slow economic growth and bumper domestic harvests in China are sparking fears that demand for imports of crops such as wheat and corn from the world’s biggest buyer will wane — just as global supplies of the grains surge.
Concerns about slowing Chinese demand are already playing out in copper, where the country’s net imports of the metal were at 13-year lows in June due in part to record exports of 157,000 tonnes as the market is oversupplied.
Imports of crude oil and condensate — a liquid hydrocarbon produced alongside natural gas — into China also dropped by 2.5mn barrels per day in July compared with a year ago, according to Vortexa, an oil tanker data group.
Zhang Jiefu, senior analyst at Wuhan-based Zhengxin Futures, said that expectations for Chinese copper demand growth in the first half of the year were “too optimistic” and had been “shattered”.
“Following this realistic logic, all commodities were dragged down by weak demand,” he said.
Marcus Garvey, head of commodities strategy at Macquarie, said the market had been expecting copper demand in China to grow 3 to 4 per cent this year. But, if the current trend continues, it is set to fall by around 1 per cent this year, he added.
“It’s more that growth has failed to improve rather than growth has cratered, so we’ve lost all of that speculative [positioning],” he said.