Weak China economic data weighs on commodity markets

Weaker than expected economic data in China weighed on the global growth story, with commodities coming under selling pressure. Easing supply side issues also weighed on prices.

Copper led the base metal sector lower after China’s domestic activity weakened in July, indicating a stagnation in the economic rebound seen after lockdown restrictions were eased in Shanghai. The slowdown spilled over to manufacturing sector, with industrial production and fixed asset investment (FAI) growth dropping to 3.8%y/y and 5.7% ytd y/y respectively. This lead the PBoC to deliver a surprise interest rate cut to revive the economy. This helped take the focus away from supply side issues in Europe. Surging power prices are putting economic pressure on smelters, with many running at a loss. This could see further cuts to capacity over the coming months.

The economic pain can be seen across sectors in China, with crude steel output dropping 6.4% y/y in July to 81.43mt. This weighed on the iron ore market, with futures on the Dalian Exchange down nearly 2% to CNY708/t. Overall, the lack of any sizeable pickup in infrastructure investment adds to headwinds the steel industry is likely to see over coming months. Energy shortages has already seen constraints placed on heavy industry in China. This could see China’s crude steel output record a second consecutive year of contraction.

Crude oil prices fell sharply following the softer economic data from China. Its apparent oil demand fell 9.7% y/y to 12.16mb/d in July, based off data from China Customs. This was compounded by the prospect of more Iranian crude entering the market. Iran signalled that it may be nearer a deal with the US on its nuclear industry. It will respond officially to the EU’s proposal for reviving the 2015 nuclear accord by the end of Monday. Iranian Foreign Minister, Hossein Amir-Abdollahian, said that if the US shows a realistic approach, we can reach an agreement in the next few days. Last week, the market had been buoyed by signs of stronger demand. Energy shortages are driving increased demand for fuel oil amid high gas prices. EIA data showed gasoline demand also rebounded recently. The prospect of more Iranian oil will still struggle to offset further losses in Russian crude, with European sanctions on Russia kicking in fully by the end of the year.

European natural gas rallied as demand soars amid a scorching summer. Russian gas flow remains constrained, with flows in the Nord Stream pipeline running at only 20% capacity. However, the energy crisis is being exacerbated by very low water levels on key European rivers. This is making it difficult for diesel, coal and other commodities to be transported through the continent. Dutch front month futures gained 6.8% to end the session at EUR220.11/MWh amid concerns the strong demand will hinder efforts to replenish storage levels leading into the peak heating season.

North Asian LNG prices followed European markets higher. This was aided by strong demand in Asia amid unusually hot weather. Temperatures in Japan are expected to remain high, potentially reaching 36 degrees Celsius according to the Japan Meteorological Agency. This has led increased interests from utilities in the spot market. They also remain concerned that the energy crisis in Europe will see increase competition for LNG cargoes leading into the winter.

The weak economic backdrop failed to ignite any safe haven buying in gold. Instead, prices fell as investors worried about what the slower growth would mean for physical demand of the precious metal. Traders appeared cautious ahead of the release of FOMC minutes, where they will be looking for any clues on the Fed’s next rate hike