Oil weakened on Friday (although it was up for the week), copper, iron ore, gold and silver all fell sharply as worries about the health of the Chinese economy engulfed markets across the spectrum.
But the message from commodity markets last week was one of confusion because of the different stories emerging from China – on the one hand there was the stern, chiding, business bashing approach, then the seemingly offhand approach to the looming problems at heavily indebted property group, Evergrande.
Then there’s the incompetence of forcing down iron ore prices with the idea of punishing Australia, while reducing carbon emissions – a policy move that has helped drive industrial output lower as other parts of the Chinese economy stumble from the impact of repeated Covid outbreaks and weak consumer spending.
Iron ore prices fell more than 20% last week and is down more than 55% since peaking in May as China intensifies production curbs to meet a target for lower emissions and therefore volumes this year, and a downturn in China’s property sector hurts demand.
The AMP’s chief economist, Shane Oliver says we should “alert but not alarmed’ about the iron ore price slump.
“Since July the iron ore price has more than halved reflecting Chinese constraints on steel production, the slowdown in its economy and recent concerns about the flow on to construction related demand from property developer China Evergrande Group’s problems.
“But bear in mind that the iron ore price has fallen from levels no one ever thought it would get to and is still very high and well above cost.
“This will dent Australia’s national income and current account surplus and add a new blow out in the Federal Budget deficit,” he wrote at the weekend.
But Dr Oliver pointed out that against this fall most other commodity prices are surging – including coal & gas (our 2nd and 4th largest exports as well as aluminium and copper – with most commodity price indexes near past mining boom levels.
“In fact, there is good reason to believe a new commodity super cycle (ex-iron ore) has begun, which should benefit Australia,” he wrote.
And no one mentions lithium where Australia’s strong position will see considerable benefits flow – the only danger will be overproduction as too many players try to get a leg up into the market.
But there are good reasons to think that this time any overproduction won’t trigger a slide in prices it did five years ago because battery demand is surging as more and more electric vehicles are produced and sold, and the world’s biggest car companies move deeper into their production which is a key difference to the previous boom.
That in turn is feeding into the boom for copper, nickel, cobalt, aluminium, as well as lithium.
The rising demand for the established metals has already seen mining giants position themselves (BHP, Vale and Rio) in these metals, leaving rivals like Glencore and Anglo American behind, even though Glencore has a big but controversial involvement in cobalt in the Congo.
Copper prices remain well above $US4 a pound based on Comex prices, (it fell 4.5% last week to settle at $US4.245 a pound as the doubts about the Chinese economy escalated).
China has refused to bid prices higher, so its copper metal and concentrates purchases have fallen for much of this year. To offset this, China has been selling metals from its strategic reserves, but those sales can only go so far before the government will need to replenish those reserves to keep it happy.
But demand for these metals is not just China, battery demand and economic growth is solid in the US, improving in Asia and improving in Europe.
China might have the lion’s share of the expected 2021 global EV production of more than 8 million units, but the rest of the world will have more than tripled output by the end of this year.
That has seen nickel prices remain around $US20,000 a tonne, cobalt prices rise and aluminium demand and prices, alumina and bauxite rices have been bolstered by the combination of Chinese production cuts and the unrest in Guinea where street riots happened at the weekend against the military junta that took control from the corrupt civilian administration.
Gold prices slumped sharply last week, ending at $US1,751.40, down 2.3% for the week. Comex silver slumped 6.5% to $US22.295 an ounce and palladium and platinum prices continued to weaken as news of falling car sales were confirmed – Ford is shutting another US factory next week because of a shortage of computer chips.
Oil prices rose for a fifth week even though they dipped on Friday to settle at $US71.97 a barrel for US West Texas Intermediate and Brent settled up at $US75.34 a barrel.
Both were up more than 3% for the week as the market ignored for a second week rumoured, but unsubstantiated reports of China selling out of its strategic stocks to try and push prices lower.
It seems the impact of Hurricane Ida on Gulf of Mexico production and processing operations is taking longer to repair and bring wells back on stream.
The weekly Baker Hughes survey of rig use in the US confirms the slow return to normality – total rig numbers in use last week were up 9 to 512 and the number of oil-directed rigs rose 10 to 411.
Meantime the high prices for oil are helping push up LNG prices in Asia. LNG prices have already been dragged higher by low supplies and a shortage of energy in China ahead of the winter. LNG prices have been reported at more than $US20 a million BTUs (British Thermal Units, the basis for gas sales). That’s more than double what prices were a year ago.
Adding to the pressures is a growing gas shortage in Europe (some analysts claim it has been engineered by Russia cutting production pressures in its pipelines ahead of the hooking up of a new huge pipeline system later this month in Germany (The Nord 2 system). The pipeline is expected to start delivering gas late this year.