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A mixed week for key commodities amid economic uncertainties

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2023-08-21

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Iron ore prices managed to rise, while oil prices ended lower, copper saw a slight increase, gold experienced a decline, and thermal coal prices rose. The week proved to be a diverse one for critical commodities, which isn't entirely surprising given the simultaneous rise in US bond yields, the strength of the US dollar, and the challenges faced by the Chinese economy.

Despite the ongoing property crisis in China, marked by weak investments and falling house prices, along with the partial bankruptcy of China Evergrande and concerns over financial asset managers, the prices of commodities such as oil, copper, and notably iron ore managed to defy expectations and move upward.

By the end of the week, the price of 62% Fe fines delivered to northern China closed at $US106.55, reflecting a 6% increase for the week and reaching the highest price since July 31. Chinese crude steel output from the previous month remained robust, as indicated by Tuesday's production data, thereby supporting strong imports of iron ore for another month.

Even with news of China Evergrande's partial bankruptcy (which is unlikely to resolve the company's deep-seated issues) and concerns regarding US interest rates and the sell-off in equity markets, the iron ore price managed to surge on Thursday and Friday.

However, this upturn in iron ore prices might not significantly impact the ASX due to the growing apprehensions about a deepening crisis in China's property sector. China's stock market has retreated 10% from its January highs, reflecting fading post-pandemic recovery momentum and a waning investor trust in the Xi government's ability to provide economic support.

China's oil imports have previously surged as reserves were replenished and small plants maintained production. Nevertheless, China's July crude imports witnessed a significant decline of 19% from June, falling to 10.33 million barrels per day, marking the lowest daily volume in six months. Moreover, onshore crude inventories in China reportedly surged to a record 1.02 billion barrels by the end of July, indicating a potential decrease in future buying.

In July, OPEC crude production fell by 900,000 barrels per day to a 1-3/4 year low of 27.79 million barrels per day. Despite a 2% decline in US West Texas Intermediate crude futures last week, they managed to end above $80 a barrel at $US81.40. Brent crude also experienced a decline of over 2.1% to conclude the week at $US84.83.

Interestingly, prices increased slightly despite Baker Hughes' weekly report indicating a decrease in the number of oil and gas rigs operating in the US. The oil rig count dropped from 525 to 520, while active gas rig numbers decreased by six to 117.

Newcastle thermal coal futures saw a 7% rise in the October futures price, reaching $US162.70 a tonne. China's thermal coal production for July declined by 6.35%, totaling just over 377 million tonnes, with the daily mining rate hitting a 9-month low of 12.1 million tonnes. China's need for over 12.8 million tonnes of thermal coal per day underscores its efforts to maintain safe power station stock levels during the summer and early autumn.

Despite the concerning news from China, copper managed to end the week with a slight gain. Comex front month prices closed at $US3.72 a pound, reflecting a 0.4% increase. Typically, negative news, particularly concerning Chinese property and the economy, would lead to lower copper prices.

Comex gold closed at $US1,918.40 an ounce on Friday, experiencing a slight increase from the earlier Friday settlement at $US1,916.50 an ounce. Meanwhile, Comex silver concluded at $US22.80 an ounce, indicating a modest rise of 0.24% for the week.

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