Chinese Stocks Decline Ravages Commodities Markets!
High Volatility Hits Commodities Markets
The rot plaguing the Chinese stock market has impacted directly on the global commodity market. Fears abound that the continuing slide in the Chinese market will spread to other markets too. As a case in point, the Bloomberg Commodity Index dropped to 96.8069 (a decline of 0.8%) midway through the second week of July. This is its lowest level in over 14 years. Prior to the dollar's fall against a basket of currencies, the price of aluminium and copper dropped to 6-year lows. Brent Oil hit a 3-month low and nickel dropped as much as 5 percentage points. Such is the severity of commodity price declines that a tonne of steel is cheaper in China than a tonne of cabbage. Commodities prices across the board went into freefall on Wednesday 8 July as WTI crude dropped to $51.65 per barrel marking a 5th straight day of losses.
Safe haven metals like gold were trading at 4-month lows and silver plunged to a 7-month low. But one of the most notable declines was that of iron ore. In China, the price of iron ore dropped by as much as 8 percentage points. Graphics of commodity price declines attest to the sharp losses of late. Nickel dropped from a January 2, 2015 price of $14,756 per tonne to a July 7, 2015 price of $10,604 per tonne. Aluminium fell from a January 2, 2015 price of $1,805.25 per tonne to a price of $1,631,50 on July 8, 2015. Silver slipped from $15.665 per troy ounce to a price of $15.0136 per troy ounce on July 8, 2015. China has now banned short selling of stocks, suspended the majority of stocks from being traded and created a massive stabilization fund with multiple stockbrokers.
Since the greenback slipped by 0.4% against a basket of currencies (on Wednesday 8 July) dollar-denominated commodities became cheaper for foreign companies. As a result, short selling has been taking place. But the deeper concern remains with China which is the world’s largest consumer of commodities. China’s insatiable appetite for iron ore, copper, crude oil and agricultural commodities is well known. However the rout which ravaged the Chinese stock market has caused a decline as much as 30% since the middle of June, 2015. Should the losses in the Chinese stock market be extrapolated to the Chinese economy overall, then overall demand will most certainly decrease leading to further drops in commodity markets.
How Severe is the Chinese Equity Rout?
With over $3 trillion wiped out in Chinese equities, the commodities markets have been feeling the pinch in a big way. Those commodities bearing the burden include iron ore, zinc and nickel – all of which are now trending bearish. In China, some 50% of companies have been suspended by the Chinese government to arrest the decline. As a result, Chinese traders are dabbling in commodities markets to meet the losses they have experienced from share trading. They are doing this by going short on commodities.
Fears that China as the world’s biggest commodity consumer is on the decline are hurting market prices. Copper prices have been driven substantially lower on the LME (London Metal Exchange) and were trading at $5,293 per tonne on Wednesday 8 July. Downward pressure has been exerted on copper prices owing to declining interest rates. This has accelerated with falling share prices in Shenzhen and Shanghai. Copper is typically used for obtaining financing in China. With equity prices at multiyear lows, traders have been turning to commodities to cover their losses, by selling them.
The oversupply of commodities – notably Brent Crude – has also exacerbated declines in commodity prices. Slow global growth, a fundamentally strong dollar, euro weakness and geopolitical uncertainty are combining to depress prices further. Commodities prices have been hurt by a resurgent dollar which has gained over 20% in the past 12 months against a basket of currencies. As dollar-denominated commodity prices increase, so non-U.S. buyers purchase less of them. But the strength of the U.S. dollar also allows for the reduction of operational costs, which in turn allows for continued production.
Since commodities like Brent Crude oil have also declined, the operational costs of commodities production have also been reduced. Viewed in perspective, it is clear that there is a ways to go before the commodities markets bottom out. Shanghai stock declines weighed heavily on the price of copper with the metal plunging from the $6,500 level to the $5,500 level in a matter of months. The Chinese GDP/Debt ratio is a deep source of concern to the country and to commodities markets. Since China does not have the same access to funding as the U.S., the Chinese have to borrow heavily to finance their massive investments. The government is trying to move from an industrial production economy to a consumer-driven economy.
Driving Profits through Put Options
Opinion is divided, and Banc De Binary experts caution against taking an overly bearish position on commodities markets. The Chinese government is capable of arresting further declines in its economy and it has a wide range of available resources to do so. According to leading economists, the impact of equity price shocks is limited in China since only 15% of typical household financial assets are held in equities. The government could intervene by way of infrastructure investment spending to shore up local confidence.
Oversupply concerns will be weighing on the minds of investors however. And then there is the Greek crisis which continues to exert financial pressure on global markets. Commodity market players will be looking closely at the EUs decision with regard to Greece in the coming days and weeks. Traders who are dabbling in the financial markets are finding many valuable opportunities to short commodities when they learn binary options and place put options on oil, copper, iron ore, and Brent crude.