Workers are seen at a production line of copper foils used for lithium batteries, at a Tongling Nonferrous Metals Group plant in Tongling, Anhui province, China, in November, 2018.CHINA STRINGER NETWORK/Reuters
In the past week, China lowered several key interest rates as data from the National Bureau of Statistics showed signs of deflation in the world’s second-largest economy. China’s economy was expected to recover this year, and its slower return to growth is having a direct impact on a number of commodities. On Friday, the China Evergrande Group, a large Chinese developer, filed for Chapter 15 bankruptcy protection in the United States in order to restructure its debt load.
In North America, the strength of the consumer is being watched closely, as that could prove to be the difference between a soft landing and a recession. Unemployment claims in the U.S. actually fell last week, pointing to a continuing tight labour market there. The unemployment rate is at 5.5 per cent in Canada and 3.5 per cent in the U.S., with hourly wages as of July up 5 per cent year-over-year in Canada and 4.4 per cent in the United States – all contributing factors to the demand for commodities.
Let’s have a look at some of those commodities:
West Texas Intermediate prices have climbed off a low of US$67.88 per barrel in July to currently sit at about US$81 per barrel despite slower Chinese growth, a strong U.S. dollar and recession fears. Russian and Saudi Arabian production cuts coupled with increasing global demand and tightening supplies are the basis for the current rise. A number of oil analysts have target prices above US$90 or even US$100 per barrel in 2024 due to underinvestment in the sector during the past few years. The International Energy Agency actually sees prices sliding in 2024 with slower macro-economic conditions and an increased use of electric vehicles.
Zinc prices have fallen to a three-month low as inventory has doubled in the past month on the London Metal Exchange and are now down 24 per cent since the start of the year. Zinc demand in China is projected to slow with government-imposed restrictions on steel production as a means of improving air quality. Revised forecasts for zinc prices are now in the range of US$2,300 to US$2,550 per tonne for the balance of 2023, down from higher levels six months ago.
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Copper is also very much affected by the Chinese economy and events such as the Evergrande bankruptcy filing. Part of the current question is whether China will boost its own economy with stimulus packages on top of the interest rate cuts. According to Reuters, copper inventories in China remain low while inventories elsewhere are elevated.
The U.S. dollar has also remained strong against other currencies, making the aforementioned commodities (priced in U.S. dollars) more expensive for buyers with foreign currencies. The stronger greenback has also affected gold and silver, which are down 3 and 12 per cent, respectively, over the past month.
Lumber prices have been rising in the past week after having fallen below US$500 per thousand board foot earlier this month. Publicly traded homebuilders in the United States saw their share prices drop over the past week given the macro view of higher housing prices coupled with the highest mortgage rates in 15 years. Interestingly, Berkshire Hathaway added three homebuilder stocks to its portfolio in the last quarter. Berkshire seems to be taking the longer view on the current lack of housing availability. Longer-term this should also benefit lumber prices and our large lumber producers.
Wheat prices have continued to fall since the Russian invasion of Ukraine in early 2022. Global production is expected to reach 800 million tonnes for 2023, an increase of 15 million tonnes over 2022. Russia is expected to have a bumper crop this year of 85 million tonnes, and Ukrainian production is currently forecast at 17.5 million tonnes. Russia remains out of the Black Sea Grain Initiative, which allowed the passage of Ukrainian grain through the Black Sea to global markets. Even with an estimated 7 per cent more area planted in 2023, lower yields mean Canadian wheat production is forecast to be 31.5 to 33 million tonnes, down from a spring forecast of 35 million tonnes. China, Canada’s largest wheat export market, is seeing reduced consumption in both food and industrial use of wheat.
Coal has also been in the commodity news lately with Teck Resources Ltd. putting its coal business up for sale and having multiple bidders emerge. A recent rise in natural gas prices has led to an uptick in coal demand in China.
China, along with the inflation/recession battle, will keep commodity markets volatile through 2023 and into 2024.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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