BMO: China’s Real Estate Market Poses Large Threat To Commodities

BMO Capital Markets recently released their fourth quarter commodity price update saying that the global metals and commodity market “has rapidly transitioned from one defined by strong sequential demand gains, to one where supply constraints.”

BMO specifically names China, where a large property company has stopped paying its debt, saying that “With property concerns in China at the fore again and central banks starting to remove the accommodative policy, demand sentiment has taken a hit and this will likely weigh on prices from current levels.”

Although demand has been slightly tepid over the last few months, BMO expects to see manufacturing demand recover in the second half of 2022 as supply chain issues start to ease. They specifically mention palladium and platinum as precious metals that have “an opportunity for price outperformance from current levels.” While they expect commodities such as met coal and aluminum to continue to be affected by supply chain issues and expect those issues to be prolonged.

In a later paragraph, they explain that for the last 12 months, global economic activity has been rising, bringing commodity demand higher. But now the opposite is happening, and “a rotation from metals-intensive goods to metals-light services is underway.” They believe this is one of the many ebbs and flows that many sectors are experiencing as the world gets back to normal.

BMO warns that historically, higher prices do end up with supply retreating. They write, “with metals leading the commodity rally, they have been first to feel this impact. With producer price inflation trending higher across all major economies, those who don’t need to purchase material now have either stepped back from the market or are likely considering doing so.” Once again pointing to China, whos seen a couple of months of the negative year-over-year consumption of steel, copper, and aluminum.

BMO then goes on to say in two separate paragraphs that 1) Chinese economic data has been mixed and has weakened and that 2) the property situation in China is a “pertinent concern” for commodity investors.

They write, “Chinese property is still the biggest single end-consuming sector in the global metals economy, and a slowdown here would be a major headwind to demand all industrial products over the coming months.” They believe that CPC and its central bank will help Evergrande unwind its books but believes that this will lead to contagion among other property developers as they start to delever.

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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