China's stock turmoil drags down remaining strong commodities

July 7
10:29 AM 2015

China's stock market rout is injecting new stress into the already ravaged global commodity sector, with prices of copper, coal, natural gas and iron ore all falling back toward their 2015 lows. Analysts say the worst is yet to come as the stronger performers - solar and oil - are now also struggling.

Falling commodity demand in China has been a concern with the Chinese economy growing at its slowest pace in a generation. The country's ongoing stock market turmoil - which has seen a 30 percent plunge in the benchmark CSI300 index since mid-June - is now threatening to pull the entire commodity complex into the red.

Of the key energy and commodity markets, only Brent crude prices and solar shares showed significant gains in 2015 - and that was earlier this year. With stock markets in China falling and oversupply in oil worsening, the two asset classes are fast giving up the gains they made this year.

Overnight, the Standard & Poor's Goldman Sachs and the Bloomberg commodity indexes fell the most since November last year as investors trimmed their exposure to energy and commodities. Analysts say there's worse to come. "China's demand stumble comes at an awkward time, just when more and more supply of raw materials is coming on stream in many sectors. No quick fix in sight," said Frederic Neumann, co-head Of Asian economic research at HSBC in Hong Kong.

"China's stock market stumble now risks knocking demand down further. What all this points to is the need for a lot more easing, including extra fiscal spending. China's economy is highly dependent on construction. With that engine sputtering, mainland commodity demand will struggle to make headway for a while," he said.

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