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Divergence Accelerates Between Chinese Imports and Commodity Prices

CHINA
  • 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).
  • The main question now is: 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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