Commodities ranging from copper to corn have been plummeting as ample supplies and waning Chinese demand have prompted fund managers to slash around $41 billion in bullish bets on natural resources.
The sell-off in copper, a key indicator of the global economy due to its extensive uses in construction, infrastructure, and manufacturing, has been particularly severe, with prices down nearly 20 percent from their record high in May above $11,000 per tonne.
Other base metals like aluminum, lead, and zinc have also declined, while corn has dropped to its lowest level since October 2020.
This sell-off has been driven by traders unwinding their significant bets on rising prices as the outlook for growth in China, the largest consumer of many commodities, has dimmed. The
Chinese authorities have also failed to deliver the stimulus that investors had hoped for.
“Investor selling pressure has been immense across copper and base metals as weak Chinese demand sentiment has been reinforced by a lack of significant policy support in July,” said Tracey Allen, commodities strategist at JPMorgan.
According to JPMorgan, traders’ bullish positions on commodities, net of bearish bets, have dropped 31 percent, or $41 billion, from a late May peak of $132 billion to July 30.
This broad sell-off marks a sharp reversal from just over two months ago when some commodities, including copper, hit record highs as investors poured in money, and bearish traders were forced to exit their positions. Many traders also turned to copper as a hedge against inflation, following unexpectedly rapid US inflation in March.
Despite a brief boost in the commodities sector on Wednesday due to fears of wider conflict in the Middle East after the killing of a Hamas political leader — with copper rebounding 2.8 percent to $9,225 per tonne — the overall sentiment has soured as China’s growth has disappointed, causing prices to fall again on Thursday.
China’s official manufacturing purchasing managers’ index, a measure of manufacturing activity, fell for a third consecutive month in July, according to the National Bureau of Statistics.
Additionally, much of the copper purchased by China in the first half of this year has been stockpiled rather than used.
“The sentiment towards commodities is really bad,” said Sabrin Chowdhury, head of commodities analysis at BMI, a data firm part of Fitch Group. The outlook “is definitely weak in the coming few months as the hopes pinned on China start to diminish completely.”
China’s Third Plenum — the Communist Party’s key policy meeting, which occurs every five years — concluded in July without major announcements of support for the struggling property sector, as Beijing continues to prioritize high-tech manufacturing.
“The plenum did not live up to expectations in terms of additional support for the economy,” said Ole Hansen, head of commodity strategy at Saxo Bank. “The short-term outlook is not looking good.”
Rio Tinto, the world’s second-largest miner, underscored the severity of China’s property market slump on Wednesday by reporting that steel demand from that sector was down by as much as 30 percent from its peak in 2020.
“Prices were below the average of the last 10 years when adjusting for inflation in the first six months of the year,” said Peter Cunningham, chief financial officer at Rio Tinto, referring to key products such as iron ore, aluminum, and copper.
A strong US dollar, market fluctuations due to US presidential election uncertainty, and weak economic growth in other regions have also weighed on commodity prices, analysts said. Recent stock market declines have led some fund managers to reduce their positions in other assets, according to Saxo’s Hansen.
For agricultural commodities, slow economic growth and abundant domestic harvests in China are raising fears that demand for imports of crops like wheat and corn from the world’s largest buyer will decline just as global supplies of these grains surge.
Concerns about slowing Chinese demand are already evident in copper, where the country’s net imports of the metal hit a 13-year low in June, partly due to record exports of 157,000 tonnes as the market is oversupplied.
Imports of crude oil and condensate — a liquid hydrocarbon produced alongside natural gas — into China also fell by 2.5 million barrels per day in July compared to a year ago, according to Vortexa, an oil tanker data group.
Zhang Jiefu, a senior analyst at Wuhan-based Zhengxin Futures, said that expectations for Chinese copper demand growth in the first half of the year were “too optimistic” and have now been “shattered.”
“Following this realistic logic, all commodities were dragged down by weak demand,” he said.
Marcus Garvey, head of commodities strategy at Macquarie, said the market had been expecting copper demand in China to grow by 3 to 4 percent this year. However, if the current trend continues, it is set to fall by around 1 percent this year, he added.
“It’s more that growth has failed to improve rather than growth has cratered, so we’ve lost all of that speculative [positioning],” he said.