With investors moving back to US Dollar and US equities from commodities, over dependence on Chinese economy is hurting the future prospect of energy commodities.

01 July 2013 Written by 


In 2009 and 2010 during the first two rounds of Quantitative Easing (QE) in US, commodity prices were rallying making them one of the most attractive investments. Investors felt that the liquidity being injected in the market will flow to commodity markets as well. These investors were investing in commodities in the anticipation of increased demand for commodities once the QE programs start kicking in and spur growth. These anticipations were well supported by external factors in the form of geo political tensions around crude oil supply, bad weather conditions which boosted agri commodities and heightened activity in China which boosted base metals.

However, in the post QE3 phase, the commodity prices have lost steam. Commodities are unable to recover from the profit booking after QE3 announcement. Expect the US, the growth prospects around the world looked bleak. China has hit a roadblock in terms of economic expansion. China has been the largest importer of commodities in the pre QE3 phase. With a subdued demand from China, commodities started trading at lower prices. In the recent times, the commodity markets are facing a huge sell off pressure. Outflows have been a constant feature of commodity markets in the past two quarters. During the first quarter, the outflows were going to emerging markets and during the second quarter a stronger US Dollar and US Equity markets attracted these outflows.

The commodity prices continued their downward trend in the month of June as well. Though Crude oil had a mixed month, base metals remained under pressure. Crude oil prices increased on the news of increase in nonfarm payroll of US, tensions in Syria and Egypt which threatened supply of crude oil and increased industrial activity in Germany. However, the profits were offset by the weak Chinese data and announcement by Fed. Base metals were hit by weak Chinese data. The Chinese economic data disappointed on various counts including the fall in trading activity, an industrial production slowdown and decreased activity in the housing market. Off all the base metals, nickel turned out to be the major loser this year. The inventories of nickel rose by 30 percent this year. The tensions over lack of supply of Agro commodities was also subdued due to timely onset of the monsoons.

The concerns over the economic recovery in the past few quarters have resulted in the reduced activity in the London Metal Exchange. This in turn aided in increased inventories of the base metals. The major metal producers have implemented steps to cut back on the production. However, these measures were not sufficient to reduce the high oversupply of base metals.The outlook for commodities in the coming couple of quarters also does not look promising. Expansion activities in Chinese economy have been one of the major driving factors for commodity prices in the past. With an apparent slowdown in the Chinese economy and the current credit crunch situation, the demand for commodities from its major consumer remains bleak. Though the measures were being taken to curb the demand and create a situation to clear the existing over supply of the metals, being highly dependent on Chinese economy is not a favorable sign for the commodities.

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