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Commodities with the biggest exposure to China are starting to price in a worsening COVID-19 situation as fears of more lockdowns worsen an already soft demand outlook.

Iron ore futures in China plunged almost 11% on Monday. London-traded copper and aluminum slipped to the lowest level since early February.

The Beijing city government ordered mass testing for COVID-19, raising fears among residents that a lockdown was imminent.

Several major cities, including financial center Shanghai, remain under various restrictions as China maintains its tough COVID-control policy.

Up until this week industrial commodities were still trading with the view that Beijing would be able to contain COVID-19 outbreaks, and, furthermore, would aggressively stimulate its economy in coming months to boost growth close to the annual target of 5.5%.

But the ongoing lockdowns, with Shanghai now entering its fourth week, have eroded confidence in China’s COVID-19 policy, while also hitting physical demand for industrial metals as factories are forced to close or work under restrictions.

Iron ore is the commodity with one of the largest exposures to China, which buys about two-thirds of all seaborne volumes.

Iron ore futures on the Dalian Commodity Exchange slid 10.7% on Monday to 795 yuan ($121.36) a tonne, the lowest close since March 23.

Spot iron ore for delivery to north China dropped to $135.90 a tonne on Monday, down 9.4% from the previous close and 15.2% below the peak so far in 2022 of $160.30 a tonne, reached on March 8.

While iron ore remains well above its long-run average of closer to $100 a tonne, the plunge in prices in recent weeks underscores how confidence in China’s economy is evaporating.

Copper is another metal that is starting to feel the weight of China’s lockdowns, with Shanghai futures dropping 0.9% on Monday to end at 74,240 yuan a tonne. The decline extended in early trade on Tuesday, with the contract slipping to around 74,240 yuan.

Benchmark London copper fell to the lowest in almost three months on Monday, ending at $9,769 a tonne, down 3.4% from the previous close.

With declines in aluminum and nickel as well, the overall picture that emerges is that China’s weakened demand outlook is outweighing supply concerns, which were elevated after Russia’s invasion of neighboring Ukraine on Feb. 24.

It’s still likely that significant volumes of Russian commodity exports will be either formally sanctioned, or buyers, especially those in Europe and other Western nations, will self-sanction.

But the impact of the loss of Russian commodities is still to be quantified, while the weakening of demand in China seems more real, with commodity imports down across the board in March, and vessel-tracking data indicating another soft month in April.


What is also apparent is that commodities with less exposure to China aren’t as badly affected.

While China is the world’s biggest importer of crude oil, liquefied natural gas and coal, its share of global imports is considerably less than it is for iron ore.

Australian thermal coal futures are continuing to post gains, ending at $328.60 a tonne on Monday, up almost 30% since the recent low of $253.40 on March 29.

The globalCOAL physical price for Australian Newcastle thermal cargoes was at $372.50 a tonne on Monday, up from an average of $326.38 for March.

China has an unofficial ban on imports from Australia, but coal prices have been surging in recent weeks as the market has anticipated the loss of shipments from Russia, which was the world’s third-biggest exporter, behind Indonesia and Australia.

LNG futures linked to the S&P Global Commodity Insights JKM benchmark have leveled off, ending at $25.40 per million British thermal units, having traded around this level for the past week.

While Chinese buyers are said to be avoiding the spot market, demand from other top importers, such as Japan and South Korea, remains strong as they seek to rebuild inventories ahead of the summer demand peak.

Ultimately, the resilience of energy commodities will be tested as well, especially if China’s COVID-19 battles continue and the loss of Russian exports isn’t as bad as feared.

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