17 January 2019
China consumes about half of the annual global output of copper, steel, nickel and aluminum.  Photo: China Mining
China consumes about half of the annual global output of copper, steel, nickel and aluminum. Photo: China Mining

More upside seen for commodities amid global economic recovery

I made a forecast at the end of last year that metals and raw materials prices would stage a comeback as global economic growth recovers. Commodity prices have indeed performed well in the past six months.

Not surprisingly, metals and coal stocks are among the best performers in the Hong Kong equity market.

The Hang Seng Index hit a 27-month high of 27,854 points on Aug. 8, which means the index has jumped nearly 50 percent since the trough on Feb. 12 last year.

During the period, metals and coal stocks spiked 119 percent and 71 percent, respectively, far exceeding the gains of the broad market.

They ranked as the second and fifth best-performing sectors among a total of 25 sectors.

Nonetheless, oil and chemical plays have lagged far behind, as oil price recovery has run out of steam due to excessive supply.

The stellar performance of resources stocks have largely stemmed from an uptick in the global economy, which bottomed out in the second half last year.

The Purchasing Managers’ Index (PMI) of major economies have started to bottom out since the second half last year.

South Korea’s export growth, another useful indicator of global economic growth, grew 19.5 percent last month.

Over half of South Korea’s exports go to China, Japan and the US, making it a handy barometer of the global economy.

Stronger global growth typically results in higher commodity prices. Meanwhile, a softer greenback also helped.

Looking ahead, as various economic data show that global economic growth is maintaining strong momentum, this bull cycle of commodities has yet to run its full course.

US economic growth has accelerated again from the second quarter after showing signs of moderation in the first quarter, which would benefit commodity prices.

Also, economic growth momentum in Asia, particularly China, remains robust. The region has been the engine of global economic recovery since the second half last year.

For example, Caterpillar, the world’s largest construction and mining equipment maker, witnessed Asia as the first region to have recovered from the previous downturn.

The pick-up of Keqiang Index, which measures electricity use, rail cargo volume and bank loans, usually goes in tandem with improving commodity prices.

The gauge has recovered since late 2015, which reflected stabilizing economic growth in China. As the world’s largest developing economy, China accounts for half of global copper, steel, nickel and aluminum consumption.

Stronger China economic growth will thus continue to underpin the metals and raw materials sectors.

This article appeared in the Hong Kong Economic Journal on Aug. 16

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist

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