China Still Hasn’t Signaled an Improvement, Impacts Metals
Will Commodities' Rally Be Short-Lived or More Sustainable?
China’s slowdown impacts metal’s movement
China is the world’s second-largest economy. It consumes about 50% of the world’s commodity. Domestic consumption and exports are two important components of China’s (FXI) economy. In recent years, domestic consumption slowed down rapidly compared to exports. During 2011–2013, a massive industrialization and urbanization transformation took place in China. After many years of investments, projects aren’t able to deliver the expected return to investors. This raises questions about additional investment plans. As a result, the demand for the commodity in domestic consumption fell.
The slowdown in domestic consumption forced Chinese policymakers to devalue the currency. Investors must understand that currency devaluation makes exports cheaper and imports costlier. China is the biggest metal buyer in the oversupplied market. It puts downward pressure on metal prices. China is also one of the largest producers of metals like aluminium and iron ore.
Since China’s turmoil is expected to continue, metals’ upside could be limited. Which event is creating panic sentiment for investors? If China devalues its currency again, metals could fall to new multiyear lows. On February 7, China reported that its foreign currency reserve fell by $99.5 billion in January. This raises concerns about the stabilization of the yuan. A decrease in foreign currency reserves normally weakens the currency.
China impacts metals
The PowerShares DB Base Metals ETF (DBB) fell by 18% from the high in August 2015. Currently, DBB trades at $11.65. Metal and mining stocks such as Nucor (NUE), Alcoa (AA), and Allegheny Technologies (ATI) are trading 10%, 17%, and 28%, above from their 52-week lows, respectively. The above graph compares DBB and FXI’s performances.
In the next part of this series, we’ll discuss different metal and mining companies’ moving average analysis.
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