Prices for some commodities, including iron ore and copper, took a hit on Monday, as the potential collapse of one of China’s biggest property developers fueled worries about the economy, and potential declines in construction and demand for raw materials.
The “festering fears” around China’s Evergrande
are “ raising concerns about a bigger economic crisis in China that could put downward pressure on a lot of the commodities that China consumes,” said Phil Flynn, senior market analyst at The Price futures Group.
Evergrande has threatened to default on more than $300 billion in debt, prompting sharp losses in U.S. and global financial markets on Monday.
Among the big questions: could this be China’s “Lehman moment”— one that leads to a situation with more systemic risk than China realizes, and is the country going to be able to contain the fallout from this crisis?” said Flynn, referring bankruptcy of the global financial services firm that contributed to the 2008 financial crisis.
For now, it’s “way too early to call this a major crisis,” and the markets may be overplaying the risk to commodity demand, he said. “Only time will tell.”
On Monday, the most-active December futures contract for 62% iron-ore fines delivered to China
settled at $91.75 per metric ton on the CME, down 8.3%. It’s on track for a monthly loss of 37%, according to Dow Jones Market Data.
Most-active December copper futures
lost 13 cents, or 3.1%, to settle at $4.115 a pound, trading down 6% for the month so far. In contrast, gold’s safe-haven appeal helped to lift prices for the precious metal on Monday.
“If Evergrande were to completely collapse, the supply and demand equation in the metals market could be whiplashed into a strong imbalance that favors the bears — never mind the potential for additional defaults,” said Adam Koos, president at Libertas Wealth Management Group.
Traders are “wondering if, perhaps, this isn’t a one-off event,” he said. “Should other developers release similar news, concerns…could bleed across the entire financial landscape in China, resulting in a potentially catastrophic cascade of selling.”
““Should other developers release similar news, concerns… could bleed across the entire financial landscape in China, resulting in a potentially catastrophic cascade of selling.””
— Adam Koos, Libertas Wealth Management Group
In reaction to the Evergrande news, U.S. and global stock markets saw broad declines. In the U.S., the Dow Jones Industrial Average
was headed for its worst day in 10 months, with the index down 2.6% not long before the trading on the stock market closed.
The potential for Evergrande to default increases the potential for the Chinese economy to slow down in 2022, said Jay Hatfield, chief executive officer and founder of Infrastructure Capital Advisors in New York.
A slowdown in China would, in turn, raise the likelihood of a recession in the U.S. next year, he said. “China is the largest importer of oil and iron ore in the world, so any slowdown of growth in China will reduce demand for those commodities.”
Oil prices on Monday declined with U.S. benchmark West Texas Intermediate crude for October delivery
down $1.68, or 2.3%, to settle at $70.29 a barrel. Global benchmark Brent crude saw its November contract
settle at $73.92 a barrel, down $1.42, or 1.9%.
Meanwhile, commodities related to the steel industry may be more of a concern, given they were the “most impacted” from renewed restrictions in China’s Xiamen and Fujian provinces to combat COVID infections, said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
Taking a look at the bigger picture, Evergrande’s funding challenges could lead to “caution in the housing market, limiting building activity and softening demand for key commodities,” said Haworth.
For now, however, while these events “do temper near-term growth,” U.S. Bank Wealth Management remains “constructive on the path forward for the global economy,” Haworth said.