Editorial: China stock market crash hits commodities

While the year-long bubble in the Chinese stock market didn’t translate into higher commodity prices, the spectacular bursting of the bubble over the past month has slammed a wide swath of commodities — including iron ore, copper, zinc, nickel, precious metals and oil — as investors anticipate further slowing of the Chinese economy.

At press time China’s benchmark index, the Shanghai Composite, had dropped to a three-month low of 3,507.19 — a 5.9% plunge from the previous close, and down a remarkable 32% from the all-time high of 5,166.35 achieved less than a month earlier on June 12.

Some US$580 billion in market capitalization has been obliterated since the June peak, even as the popularity of stock trading has grown exponentially amongst individual Chinese investors, estimated to number 90 million.

The particularly sharp drop on July 7 — a day the index fell 8.2% in mid-session — could actually have been worse, as stocks traded on the Shanghai and Shenzhen exchanges are halted for the day after they drop 10% in one session. At the moment, trading has been halted for this reason on more than 50% of mainland China stocks, even as the rout has rippled across the world’s stock and bond markets.

Worse yet, chartists point to the ominous look of the long-term chart for the Shanghai Composite Index, with a massive head and shoulders formation appearing that strongly suggests a return to levels around 2,000 over the next year — i.e., back to where it was only a year ago.

The command-and-control reflex of the Chinese government has reappeared in response to the stock plunge, with the government instructing large domestic players — such as major state-owned enterprises — to buy Chinese stocks on the open market, even if they have borrow or sell bonds to get the money to do so. Indeed, large, favoured companies of the central government such as Bank of China and Agricultural Bank of China Ltd. were up by double-digit percentages in the past week due to such buying, leaving smaller, less connected companies to bear the brunt of the wider panic selling.

With commodities prices already showing weakness through the first half of the year owing to expectations of a slowing Chinese economy, this latest sharp decline in Chinese stock markets has battered commodities prices, but none more so than spot iron ore prices, which plummeted 10% on July 7 to US$44.59 per tonne (62%Fe). It was the biggest daily drop on record, and set prices under the lows seen in April 2015. Since early June, iron ore prices have sharply retreated from US$65 per tonne, wiping out the gradual recovery that iron ore miners had enjoyed since mid-April.

It’s a depressing walk though the other base metals, with copper trading around US$2.50 per lb., after seeing US$2.90 two months ago; nickel at just $5 per lb., after trading at US$6.50 two months ago, and above US$8 a year ago; aluminum at US73¢ per lb., off from US84¢ two months ago; zinc at US90¢ per lb., after hitting US$1.08 two months earlier; and lead at US80¢ per lb., down from US93¢ two months ago.

Precious metals are similarly limping along at US$1,158.50 per oz. gold, US$15.09 per oz. silver, US$1,031 per oz. platinum and US$652 per oz. palladium, with prices for all these metals easing off over the past month.

Much to the dismay of gold bugs, gold and silver have not been much of a safe haven during the current Chinese stock rout and the ongoing meltdown of the Greek economy. Gold bugs are in the uncomfortable position of having been right on the macro story of Chinese stocks being in a bubble, and the inherent instability in the euro’s set-up, but wrong on the micro story of gold prices benefitting from these macroeconomic troubles.