June 29, 2015 / 10:06 AM / 5 years ago

Greece a sideshow to China's main game for commodities: Russell

LAUNCESTON, Australia, (Reuters) - With the focus on whether Greece will or won’t default on its debts or even stay within the euro zone, the important news of China easing its monetary policy again has been largely sidelined.

Metals are seen transported at Qingdao port, Shandong province, June 22, 2009. REUTERS/Stringer

As fascinating as the Greek machinations are, ultimately they will have little impact on commodity markets, other than the potential to boost some safe-haven demand for gold and possibly other commodities, such as agriculture, which have little correlation to equities and bonds.

The real news is that the world’s largest commodity producer, consumer and importer appears to be taking more determined steps to boost its flagging growth rate.

China’s central bank cut lending rates for the fourth time since November, while also trimming the amount of cash that certain banks have to hold as reserves.

In a possible sign as to how serious the authorities are in getting money to flow faster through the economy, this was the first time since the global financial crisis in 2008 that both interest rates and the reserve ratio were cut at the same time.

There has been some suggestion that the motivation for the June 27 policy action was to boost the flagging stockmarket, which has slumped around 20 percent in the past two weeks.

But it would seem more likely that the long-term aim is to lower borrowing costs and get businesses to boost credit uptake, with any support to the stockmarket falling into the category of a welcome short-term side effect.

The other point that needs to be considered is the likelihood of further easing, given real interest rates remain relatively high, especially given the slowing state of economic growth.

While the consumer price index eased to an annualized 1.2 percent in May from 1.5 percent previously, the producer price index remained at minus 4.6 percent, and it has been in negative territory for the past three years.

This means the pricing power of Chinese manufacturers has been eroding at a time when interest rates are high in real terms, with the latest cut taking the benchmark 12-month rate to 4.85 percent.

It’s possible that this rate will drop to around 4 percent by the end of the year, especially if the economy doesn’t respond to the monetary stimulus being injected.

It’s not clear if the increased monetary stimulus actually matters for China’s commodity demand as the efforts so far haven’t resulted in any noticeable surge in imports.


In theory, if the stimulus feeds through to increased infrastructure spending, more residential development and a boost to manufacturing, then demand for industrial commodities should increase.

This would benefit commodities like copper, iron ore, alumina and bauxite as well as zinc, nickel and manganese.

The main question is whether enough extra demand will be created by stimulus to boost imports by enough to spark a demand-led price increase.

For many commodities, especially those in structural oversupply, it seems unlikely that even if Chinese economic growth does start to re-accelerate, it will be enough to rally prices.

Iron ore and coking coal fall into this category, with available supply likely to swamp any increase in Chinese demand.

Copper is less certain, with any strong increase in Chinese demand likely to tighten the market and squeeze prices higher.

But such is the cautious nature of investors and traders currently that they may wait to see concrete signs of rising demand rather than buying the hope and waiting for the fact.

If the Chinese stimulus is successful, it may boost fuel consumption, particularly diesel, which is mainly used in the industrial and construction sectors.

Again, this may not show up in rising imports of crude oil, rather it may serve to cut exports of refined products as more of the refinery output is consumed domestically.

Overall, there is still little to suggest that Chinese commodity import demand is on the verge of a stimulus-led surge, rather the monetary easing efforts may be enough to keep import volumes from slipping.

At best this suggests modest support for commodity prices from China, and it will take solid evidence of a rebound in the Chinese economy to convince otherwise.

Editing by Himani Sarkar

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