China Commodity Trades Turn Tricky

Chidem Kurdas

If economic growth in China, the largest user of major commodities, is recovering – the data are contested – then it makes sense to buy those commodities.

Some markets show signs of recovery. The recent uptick in iron ore and steel prices is due to growth in the third quarter, says Young-Jin Chang, director of metals research at the futures exchange CME Group. She was speaking at a Capital Link conference.

But the China growth effect seems to be weak or swamped by other factors in certain commodity markets. While China burns huge amounts of coal, coal prices are falling, noted Ola Strand Andersen, managing director at Marex Spectron Asia, a commodities brokerage.

The reasons are oversupply and a domestic price war by big Chinese coal producers who want to edge out smaller producers. The country is a major producer as well as consumer of coal, importing only when the price is low enough.

However, the need for cleaner fuel to reduce air pollution may lead to more imports from the United States, which is a high-cost producer.

In the volatile oil market, Chinese demand appears to be shoring up prices. There is more demand for fuel oil from the Far East, said Charles Davies, vice president at World Fuel Services. Inventories are building up in Europe and being shipped to Asia.

Prices have been very choppy but within a defined trending range. He expects the fuel oil price to go up as a lower sulfur limit is imposed in certain areas globally. It is difficult to get low-sulfur fuel oil.

Thus environmental measures are having a significant impact on commodity markets, a factor that could magnify the price effect of Chinese economic expansion.

Meanwhile, a spurt in Chinese iron ore imports this summer was described as evidence of a stronger economy.

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