Slump in demand in China weighs on commodity prices

A decline that has been going on for more than two months. After the commodity rally, led by gold's rises, the Bloomberg Commodity Index has left 10 per cent on the ground since the end of May, while in the last week the decline amounted to 1.6 per cent. Extending the horizon to the end of 2024, commodities end up in negative territory. The drop in valuations spares no sector: precious metals, non-ferrous industrial metals, the energy sector and, finally, the agricultural sector.

The main reason to explain the commodity correction lies in the sharp drop in demand in China. Above all, but not only, weak economic data from Europe and the US contribute to the deflation of the sector, which also suffers from below-average international trade flows. "China has an impact on 50 per cent of commodities globally, but very low domestic consumption, the crisis in the real estate sector and recent export duties have played a major role in the drop in demand," explains Michael Palatiello, managing director and strategist at Wings Partners Sim, a company specialising in commodities. The commodities market held until the Chinese Plenum, waiting for news, which, however, did not come. This is why investors have started to lighten their positions'.

Fundamentals, at least for some metals, remain good, so we need to carefully assess what the outlook will be in order to seize any opportunities from an investment perspective. "I would focus on non-ferrous metals that are useful in supporting the energy transition path, so copper and aluminium, but also zinc, used in wind power production," adds Palatiello. As for gold, the outlook remains good with central banks willing to tolerate higher inflation than the rigid 2% threshold and therefore ready to continue with money cost cuts. And usually when interest rates fall, the price of gold rises. Then the geopolitical risk has to be considered. After the Israeli blitz in Tehran, with the killing of the Hamas leader, and a consequent increase of fears for an escalation in the Middle East, the price of oil went up, with Brent crude resuming 80 dollars a barrel.

"The dynamics of commodities and geopolitical tensions are intertwined," comments Vincent Mortier, group chief investment officer at Amundi. "Metals, particularly copper and rare earths, seem more exposed to geopolitics than energy, but the rise in gold valuations also points to a general perception of structurally higher geopolitical risk. Furthermore, metals are linked to the energy transition and implicitly to the technology war between the US and China'.

Industrial non-ferrous metals, such as cobalt, which is central in the construction of batteries for electric vehicles, is mainly mined in Congo, where China and Russia now have more influence than the West. In this context Amundi sees gold at $2,500 per ounce, while the price of copper is expected to settle above $10,000 per tonne.