Since China is the top consumer of commodities, their prevailing economic woes hit the global commodity prices adversely. Recent economic data reveals that the Chinese manufacturing sector is contracting at its fastest pace in three years, signaling weak physical demand for commodities from that country.
A crash in equities, devaluation of the Yuan and measures taken by Chinese policy makers to step up growth is raising questions about the growth outlook of the world’s second largest economy.
Concerns over Chinese woes not only pondered the global commodity prices, but also equities too.
The recent severe slump in Chinese equities, the worst monthly drop in 6 years pondered the sentiments of global equities as well.
Being a big player in the global economy with trading relations between many countries, its slowdown would hit the other countries economy too.
The base metal complex was the worst hit commodity complex followed by crude oil. Metal prices in the key London Metal Exchange have fallen to multi-year lows in anticipation of lower Chinese demand. NYMEX oil prices crashed to the lowest level since 2009 March on reports of global supply glut and concerns over demand from the world’s second largest oil consumer.
At the same time, corresponding sell-off was witnessed in domestic commodity prices as well, but a feeble rupee has provided lower level support. Wide swings were seen in domestic gold and oil prices while base metals complex were largely on the downside.
Meanwhile, agriculture commodities were steady except rubber. Rubber prices, exhibited liquidation in line with its international counterpart. Reports of lower Chinese consumption and higher inventories pondered the overseas prices.
Nickel is the commodity which lost the most in base metal complex. In MCX, Nickel futures dropped to the lowest level since May 2009. During this year the commodity lost more than 35% tracking the international prices.
Copper is the other which dropped to Rs 326.10 in MCX shedding around 18 percent since January. However, it has been the lowest level since August 2010. P
erformance of other base metals like Zinc, Lead and Aluminium was also not different in the domestic market.
Though worries over US interest rate hike and strong dollar is the prime reason for hefty sell offs in gold, Chinese economic woes too hurts the sentiments. Since China and India accounts almost half of the world’s physical gold, prevailing worries over Chinese economic growth prompted speculators to reduce bullish bets on gold.
In MCX, prices plunged to August 2011 levels, but a swift recovery has seen following depreciation in Indian currency.
C P Krishnan is whole time director at Geofin Comtrade Ltd. The views expressed here are personal.