Fear of Glut Grips Commodities as Xi Shifts China Economic FocusBy and
Concern that China consumption may slow derails metals rally
Inventories of soybean, wheat increase; U.S. oil supply gains
A slowdown in the world’s biggest consumer of most commodities is reviving fears over a glut in raw materials.
The Bloomberg Commodity Index extended declines after sliding the most in six months on Tuesday. Futures in China also plunged in overnight trading. Concern is increasing that demand will weaken as the world’s second-biggest economy dials back amid a pledge by President Xi Jinping to focus on the quality of expansion rather than the pace of it. Nickel, iron ore and oil all dropped, and shares of resources companies slipped.
After signs of tighter supply and stronger demand drove a rally from late June through early this month, commodity investors are now weighing whether they were too optimistic. The Chinese slowdown is seen hurting metals use. In the oil market, U.S. production is rising and an extension of OPEC-led output curbs to ease a glut suddenly looks uncertain amid Russian hesitation. World wheat and soybean inventories are expected to reach a record.
“China focusing on the quality of economic expansion signals the pace of its growth will slow, which is pretty bad for commodities,” said Will Yun, a commodities analyst at Hyundai Futures Corp. “Although the market widely believes the supply cuts led by OPEC will extend until next year and Russia will eventually follow Saudi Arabia’s lead, U.S. shale producers will continue to put downward pressure on oil prices.”
The Bloomberg commodities gauge was 0.1 percent lower at 8:29 a.m. in New York, after sliding 1.2 percent on Tuesday, the biggest loss since May 4. The recent rally had taken it to the highest level since March. The measure fell for five straight years through 2015 as glut concerns in many markets spurred the biggest downturn in a generation.
Resources companies led losses in Asia and Europe. PetroChina Co. slid 3.1 percent in Hong Kong, while India’s Oil and Natural Gas Corp. declined 2.5 percent. Nickel Asia Corp. in the Philippines decreased 2.1 percent. In London, BHP Billiton fell 1.9 percent while Glencore Plc tumbled 2.2 percent and Anglo American Plc lost 1.9 percent.
Nickel in London decreased 1.1 percent after sliding 5.7 percent on Tuesday. The metal slumped as much as 5 percent to its daily limit at 94,650 yuan ($14,300) a ton on the Shanghai Futures Exchange. The drop’s derailed a rally that sent a gauge of industrial-metals prices to a three-year high two weeks ago. Zinc and lead also fell on Wednesday.
Latest Chinese data show factory output and fixed-asset investment all expanding at a weaker pace, while home sales fell by the most in nearly three years. Stringent air pollution curbs have also hit factory production and a slowdown in credit may weigh on the economy in the fourth quarter.
Iron ore for January dropped as much as 4.8 percent on the Dalian Commodity Exchange, the biggest decline in almost three weeks, amid output cuts at steel mills in China to ease pollution during winter.
“Prices of metals tend to adjust around the year-end, while China’s battle against pollution tends to further erode demand over winter,” said Hyundai Futures’ Yun. That means declines driven by seasonal factors may be short-lived, he said. China’s economy is on track for its first full-year acceleration in seven years.
Crude futures dropped as much as 1.3 percent in New York as the International Energy Agency said recent price gains along with a milder-than-normal winter are slowing demand growth. Brent crude, gasoline and heating oil also declined.
Wheat on the Chicago Board of Trade fell 0.5 percent to $4.43 a bushel. In China, soybeans lost as much as 1.8 percent while rubber slumped as much as 6.3 percent.
Money managers are betting on more dark days ahead for global grain markets. Hedge funds expanded their net-short position across the three biggest American crop markets to 283,971 futures and options in the week ended Nov. 7, according to U.S. Commodity Futures Trading Commission data released Monday.
“If China slows down, that could cause a major turnaround for the global market in commodities,” said Peter Thomas, a senior vice president at Zaner Group in Chicago. “Absolutely, that’s going to affect prices.”
— With assistance by Martin Ritchie, Ben Sharples, Phoebe Sedgman, Jasmine Ng, and Eddie Van Der Walt