COMMODITIES IN FOCUS
Will the fire rooster’s crow wake a year of prosperity?
By Andrew Rigden Green
2017 is the Chinese zodiac year of the rooster. Seen as independent, warm-hearted and
quick-minded, the rooster has lots to offer the new year. But roosters are also considered
to be impatient, quickly interested in something, but quickly tiring of it. Does this have
something to say to the commodities market for 2017?
China has demonstrated time and again that as the world’s second largest economy, it is a force to be reckoned
with when it comes to its ability to drastically influence global physical commodities prices. However, as market
participants have learned in 2016 – often to their chagrin – China has also begun to flex its muscles by moving
commodities futures prices around the world.
Cycles of boom and bust are a familiar phenomenon in the Chinese investment markets, and commodities
investments have apparently become the objects of desire du jour as Chinese investors are flocking away from
increasingly restrictive property markets and toward commodities markets. Around October 2016, the PRC
government tightened restrictions on residential property markets in first- and second-tier cities in an effort to
curb inflated housing prices. Within weeks, thermal and coking coal futures had hit a record high since their
debut in 2013 while zinc soared to its highest levels since 2011. Steel rebar, nickel, tin, iron ore and rubber
futures also reached multi-year highs.
A popular view amongst commodities market watchers is that faced with the PRC government’s bubble-bursting
measures in the property markets, strict monetary export controls and relatively underdeveloped capital
markets, cash-rich Chinese investors have taken the view that commodities will be the next big boom.
However, other market analysts have opined that the notable rise in commodity prices in 2016 was mainly due
to capacity reduction on the supply side.
Trading volumes on the Shanghai and Dalian exchanges had already exploded during the first four months of
2016, prior to the property market-curbing restrictions adopted by the PRC government. It has been reported
that the average length of time that Chinese futures contracts are being held is less than four hours, which
suggests that these trades are done by sophisticated market participants using high-frequency algorithms for
purely speculative purposes. As a result, Chinese metals investors have become movers of global prices that
had previously been largely determined in London.
As a further sign that China’s excess liquidity has found its way into commodities, the prices of products from
thermal and coking coal futures to glass and even garlic have spiked since mid-2016.
Now, two months into 2017, it does not appear that the Chinese appetite for commodities investments is
slowing down – at least for now. Futures prices of coking coal, rebar, copper and zinc surged in January 2017 as
market participants traded on the expectation that that supplies will fall following new government measures
aimed at pruning excess capacity and curbing industry-related pollution.
In terms of physical commodities, as of January 2017, China’s imports of crude oil, coal and iron ore had surged
by 13.6%, 25.2% and 7.5% respectively, according to China’s General Administration of Customs. Over 2016,
shipments of oil, iron ore, unwrought copper, copper concentrates and soybeans hit all-time highs. Market
analysts interpret this as a sign that substantial government spending on infrastructure projects has driven
demand for base metals and steel, while the government’s efforts to clean up dirty industries and forcibly shut
down coal mines have forced utilities companies to import coal from abroad.
Perhaps early enthusiasm will quickly wane, as the Chinese zodiac says of the rooster? Or perhaps the
characteristics of independence and quick-mindedness will win out for the rooster?