Price deflation in China threatens demand for metals

Speculators on the rise in material prices-which is contingent on the recovery of demand in China – are hoping for a more visible policy of support for the economy, in light of falling prices in the world’s largest buyer of raw materials globally.

The import falter worsened, and the long-term real estate market stagnated, in light of falling consumer prices, coinciding with the decline in delivery prices at the factory gates as well, which led to the country entering a period of price deflation. Although the government has said that the decline will be temporary, it is nevertheless another worrying sign for commodities and raises the priority of efforts to stimulate the economy more than ever.

The price deflation in China is likely to affect investors ‘ attitudes to the materials markets, but it will take a few months to reflect on real demand, according to Amelia Xiao Fu, head of the Commodity Strategy Unit of BOCI commodities UK (BOCI Global Commodities UK). This may eventually affect base metals such as copper, which is used in a large way in the production of consumer goods.

Meanwhile, consumers ‘ reluctance to spend is putting more pressure on the state to boost demand. Beijing has indicated that it will do so, but the details have not yet been finalized, and the government is unlikely to agree to spend directly on expensive items such as infrastructure, at a time when the financial situation of local governments is considered unstable.

For their part, commodity producers will want to avoid a prolonged period of price deflation that will push households to postpone purchases of goods such as jewelry, household appliances and cars. The trick is to prevent deflationary pressures from penetrating the economy through a more targeted stimulus that does not in itself generate a risk group.