Weak Chinese economic data weighs on commodity markets

The commodity market struggled to keep its head above water as a stronger USD weighed on investor appetite. Sentiment was also impacted by a weaker outlook for Chinese demand.

Crude oil came under pressure early in the session after weak economic data in China raised concerns over demand. Q3 GDP came in at 3.9% y/y, while retail sales growth slowed to 2.5% in September. However, it was the spectre of ongoing virus controls which weighed on sentiment. President Xi Jinping secured a third term in power and installed loyalists in the top ranks of the party. He didn’t indicate any departure from the zero-COVID strategy that has weighed on economic activity. The recent recovery in China’s oil imports faltered in September. Independent refiners failed to utilise increased quotas amid ongoing lockdowns weighing on demand. This was exacerbated by falling refinery margins and product export curbs. Early losses in the session were reversed as the focus returned to the tight physical market amid ongoing supply constraints. There are signs that EU sanctions on Russian oil are having an impact before their implementation. Seaborne shipments from Russia fell to a five-week low in the seven days to 21 October.

The slump in European natural gas continued as warm weather eased concerns of shortages this winter. Dutch front month futures fell below EUR100/MWh for the first time since June. High temperatures in Europe are expected to remain into next month, delaying the heating season and allowing storage facilities to be filled. European leaders are pushing ahead with measures to contain the energy crisis. The European Commission has proposed a price cap on gas used in electricity generation and steps to avoid extreme spikes. The bloc’s energy ministers will meet later this week to thrash out the finer details of the plan. North Asia LNG futures fell on the prospect of ongoing weakness in Chinese demand. Natural gas imports in September rose from August levels but remained subdued on a seasonal basis.

Base metals were lower as the market reacted to leadership changes in China following the National People’s Congress. President Xi’s strengthening of power suggests little reprieve from economic headwinds. Economic data released on Monday showed a mixed recovery in the third quarter. While retail sales growth fell, industrial production and fixed asset investment growth both rose. Even so, supply tightness in China and the rest of the world has prompted the world’s largest producer to increase purchases. Copper imports were up strongly in September as the outlook for demand from the power sector improves. This was supported by lower prices and a favourable import parity. Copper stockpiles available to withdraw from LME warehouses extended a slide on Monday, another sign of market tightness.

Iron ore futures were largely unchanged. The improvement in China’s fixed asset investment provided some hope that demand would continue to improve. Nevertheless, sentiment remains fragile as concerns persist over the property sector. The National People’s Congress confirmed our view that there will be no easy fix for property sector woes. Economic data released yesterday showed the issues are far from over. Home prices in major cities fell for the 13th consecutive month, despite government policies to support the market. Infrastructure is now becoming the most likely sector through which demand for steel and iron ore can receive a boost, but its impact on demand is waning.

Gold edged lower as a stronger USD weighed on investor demand. The currency moves were exacerbated by the selloff across Chinese equities following the reshuffle of China’s Politburo and the Central Committee.