Commodity Wrap: Weak economic backdrop weighs on iron ore and base metals

Welcome to our first Weekly Commodity Wrap, where we review and break down some of the most important commodity movements and trends.

Commodities at a glance

The Bloomberg Commodity Index is down -4.7% this week.

The return of lockdowns in China, a troubled Eurozone and still-hawkish central banks continues to threaten the likelihood of a fully-fledged recession, weighing on risk assets and commodities.

Bloomberg Commodity Index futures (Source: TradingView)

Iron Ore

Singapore iron ore futures are down -9.4% this week to US$95.3 a tonne, the lowest since November 2021.

Iron ore has broken the psychological US$100 level as China places the southwestern city of Chengdu (approximately 21m residents) in lockdown.

Iron ore prices continue to dip lower amid broad-based concerns for the Chinese economy and in absence of any outsized stimulus measures to buoy its troubled property market.

Earlier this week, the world's largest steelmaking company - Baoshan Iron & Steel - warned about "severe challenges" in the third quarter.

More broadly speaking, "China's steel producers are struggling with the most difficult period they've encountered since the central government's tough supply-side reforms of 2016, due to the slower-than-expected recovery in steel demand and mounting pressure from high production costs," according to Mysteel.

Over January to July, the total gross profits of China's Iron and Steel Association's 90 key steel mill members plunged -63.4% year-on-year due to higher raw material prices and falling steel prices.

Singapore iron ore futures (Source: TradingView)

Copper

Copper futures are on a five-day losing streak, down -8.4% to US$3.34/lb.

Contrary to all the headlines and forecasts about copper demand and tight supply, prices rolled over this week, facing similar economic and China-related concerns as iron ore.

Last Friday, Oz Minerals (ASX: OZL) quoted forecasts from CRU Group, which "sees a significant requirement for the inducement of new supplies of copper, reaching 6.4m tonnes by 2035. This is equivalent to approximately one third of the total copper market today that needs to come online within 15 years."

Still, copper might have to get through the current rising interest rate and increasingly recessionary environment first.

Copper prices are down almost -33% from March peaks of US$5.04/lb.

Copper futures (Source: TradingView)

Oil 

Brent crude oil is down -6.8% for the week to US$93.8 a barrel.

"​The lockdown of Chengdu, a vital transportation hub, will trigger another massive shock for the Chinese economy," said Oanda senior market analyst, Ed Moya.

"If September becomes a bloodbath on Wall Street, WTI crude could slide towards the $80 region, but the supply outlook should prevent a significant selloff beyond there," he added.

Brent crude oil (Source: TradingView)

Gold

Gold spot prices fell -2.2% this week to US$1,700 an ounce.

Gold has been in freefall against a surging US dollar and rising Treasury yields. The US dollar continues to flex its status as the true safe haven after hitting a 20-year high against the Japanese Yen and breaking parity with the Euro.

If anything, gold is behaving like a risk asset, rallying in parallel with the market's recovery between mid July and mid August.

Gold spot price (Source: TradingView)

Coal 

Newcastle coal futures rose 0.1% this week to US$427 a tonne.

Newcastle coal prices remain within an arms reach of all-time highs of US$440 amid ongoing structural benefits such as gas-to-coal switching in Europe, China adding more coal-fired power capacity and ongoing supply disruptions from major producers such as Australia.

China is planning up to 150 gigawatts of new coal-fired power capacity from 2022 until 2025 to meet record demand, according to the Chinese State Grid Corp on Wednesday.

China is the world's largest coal consumer, accounting for 53% of global consumption in 2021, according to the International Energy Agency. The country as not pledged to reduce coal use until 2026.

Newcastle coal futures (Source: TradingView)

Uranium

Uranium futures rose 8% this week to US$52.4/lb, according to fuel brokers UxC.

Prices have continued to find momentum following last week's news that Japanese Prime Minister Fumio Kishida wanted to revive idled nuclear reactions and also seek to build next-generation ones.

Catalysts fueling this week's price was include:

• Hungary granting construction licenses for two Russian design VVER-1200 reactor units

• South Korea announced it expects nuclear power to comprise 33% of its total power generation by 2030, up from 27.4% in 2021

• French Economy Minister emphasizes the importance of nuclear in efforts to relieve surging gas and electricity prices. "There is no energetic transition without nuclear energy," he said