China’s commodities markets are heading into the Lunar New Year break on a glum note, with deflation embedded on both the consumer and producer sides of the economy.
Weak aggregate demand is the central issue for policymakers, but last year’s binge on imports has left a lot of commodities looking oversupplied as well. That’s particularly true for energy, which saw record hauls of coal and oil and a big increase in natural gas. Warmer weather and tepid industrial demand are likely to pressure power markets going forward. Crude consumption is also expected to soften once the usual increase in holiday travel is out of the way.
Grain markets face similar issues around ample supply, while the outlook for pork is particularly gloomy. That’s compounding pressures on consumer prices, which fell at their fastest pace in January since 2009.
But metals could prove more resilient. The 16-month slump in prices at the factory gate has at least narrowed. The global copper market is tightening and green demand is booming, while iron ore and steel inventories in China remain relatively low for the time of year.
Much depends on how demand shapes up once China’s construction season begins anew in March, and whether fiscal stimulus will continue to effectively counter steep declines from the crash in the metals-intensive housing market.
That leaves all eyes on the government’s response to the economy’s woes, which now include a crisis of confidence in the stock market. More forceful stimulus is generally viewed as the remedy for what ails Chinese growth in the short-term, but local government finances are precarious and Beijing has so far been reluctant to offer more than piecemeal support. A reset on that front could come at the annual policy-setting meeting in early March.