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Can The Trend In Commodity Prices Persist Despite Weakening Global Demand?


Executive summary

  • Investors have been questioning if the trend in commodity prices could persist in the medium term as global demand keeps weakening and a growing range of ‘fundamental’ indicators keep pricing in ‘cheaper’ commodities.
  • Commodity prices have been mainly supported by the global supply chain disruptions and the investment narrative with market participants seeking for ‘inflation-hedges’.

Link to full publication:

China vs Commodities - F.pdf

In the past few months, we have seen that commodity prices have been constantly reaching new highs while global demand has been significantly weakening. Part of the weakening in global demand has been attributed to the sharp deceleration in Chinese economic activity amid ‘zero-Covid’ policy (which keeps weighing on growth expectations). The chart below shows the strong divergence between China imports (YoY), which have fallen to -0.1% in March (down from over 30% YoY in November last year) and the annual change in commodity prices (BCOM index). As China represents over 50% of the total demand for some commodities (i.e. copper), the two times series have historically strongly co-moved together in the past 20 years.

Two main factors could explain that divergence:

  • Global supply chain disruption (Covid, severe droughts in Latam and more recently the Ukraine war shock).
  • The investment narrative with participants looking for ‘inflation hedges’ as inflation keeps surprising positively (commodities have historically been good ‘inflation hedges).

Can the divergence persist in the medium term?

Sentiment on commodities is ‘strongly bullish’, global demand is weakening and some investors are speculating that inflation peaked in March.

Source: Bloomberg/MNI

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