Energy sector doing the heavy lifting as metals falter

The commodity sector is showing a growing divergence between metals and energy, with the Russia/ Ukraine war continuing to raise supply concerns for crude oil, refined products and natural gas while industrial metals have suffered a continued setback on concerns about the short-term direction of the Chinese economy.

During the past week, the Bloomberg Commodity Spot Index rose by 2.2% and sits just below the April record, but as the table below shows, the gains were mostly driven by strong gains in energy, led by US natural gas which surged to the highest level in almost 14 years.

Industrial metals have become increasingly challenged by China’s stubborn adherence to the Dynamic Zero Covid policy despite mounting economic and social costs. Lockdowns have reduced mobility, productivity and with that the economic growth outlook. On Thursday, the Standing Committee of the Chinese Communist Party, chaired by President Xi, doubled down on its policy and asked for its leaders not to waver in pandemic control.

While infections in Shanghai,

China’s financial hub, have been on a continuous downtrend since April 22, the prospect for a return to normality still seems weeks away. China’s current situation was recently described by a major investor in Hong Kong as the worst in 30 years with Beijing’s increasingly fraught zero-covid policies slowing growth while raising discontent among the population.

As a result, global supply chains continue to be challenged with congestions at Chinese ports building, while demand for key commodities from crude oil to industrial metals have seen a clear drop.

One of the consequences being the need for the government to launch a major stimulus drive to support a recovery in growth, currently well below the 5.5 per cent target. Such initiatives are likely to support the industrial metal sector given the focus on infrastructure and energy transition, hence our view that following the recent weakness a floor is not far away.

Other current drivers for the commodity sector remains supply disruptions driven by the war in Ukraine supporting energy, while a continued surge in US bond yields and the dollar continues to create some headwinds for investment metals such as gold and silver.

The US Federal Reserve stepped up its pace of tightening by raising its benchmark rate by 50 basis points with similar hikes expected at future FOMC meetings, the next on June 15 and July 27.

The Bank of England meanwhile warned of recession risks from double-digit inflation, and the intensified concerns over inflation helped drive US tenyear yields past 3 per cent while global stocks took another tumble, thereby souring the investment climate further.