China Slowdown Is Rocking Raw Materials

China Slowdown Is Rocking Raw Materials

TATYANA SHUMSKY , SHEN HONG and RHIANNON HOYLE

March 11, 2014 7:20 p.m. ET

The economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal.

On Tuesday, copper prices skidded to their lowest level since June 2010, bringing the metal’s year-to-date losses to 12%. Iron-ore prices are down 8.1% this week, after falling to their lowest level since October 2012 on Monday. Aluminum, lead and zinc prices also have declined in recent days.

“The best way to define the mood in the market right now is panic,” said Bob Haberkorn, a senior commodities broker at RJO Futures. “Everyone understands why we are going down, but nobody can tell where the bottom is.”

Iron ore and copper are barometers of the Chinese economy, the world’s No. 1 consumer of both.

Beijing’s decadeslong push to industrialize the Chinese economy and move people to cities vaulted China in the 2000s to the top spot among the world’s commodity consumers. Now that growth in the world’s second-largest economy is downshifting from double digits to an estimated 7.5% this year, many investors and analysts predict global demand growth for industrial commodities will slacken.

While China’s economy still is growing, “it’s a slower pace of growth and that’s what the commodity markets, especially metals, are seeing,” said Jeffrey Sherman, a portfolio manager at DoubleLine Capital LP who helps manage $48 billion.

Mr. Sherman said his fund has stayed away from commodity investments in the past six months and shed its holdings of Chinese stocks at the start of the year.

Iron ore is the main component of steel. China’s steel consumption has surged in the past decade as the property and manufacturing sectors boomed. Now that China’s leadership has pledged for a more consumer-focused economy, the demand trajectory for steel is in doubt, analysts said.

Coking coal, used to fuel the blast furnaces that forge steel, has also been under pressure, with prices down 7.1% this year.

Recent strains in China’s financial markets are also contributing to the broad-based selloff. Last week’s first-ever corporate-bond default on the mainland showed that the Chinese government isn’t guaranteeing this corner of the country’s credit market, as was widely believed. The yuan’s weakening has made it more expensive for companies to import dollar-denominated commodities to be used as collateral for loans created outside formal channels for bank lending. China’s central bank keeps the yuan in a tight trading band against the dollar.

“If there’s a string of defaults in China, there’s no question that demand for copper and iron ore and other commodities where China’s been a major driver would be threatened in a material way,” said Michael Tiedemann, who manages $8.5 billion at Tiedemann Wealth Management in New York.

Not all commodities reliant on Chinese demand are suffering. Soybean prices are near five-month highs, buoyed by Chinese demand.

From the start of September through the end of January, U.S. exporters shipped 28% more soybeans to China than a year earlier, according to the U.S. Department of Agriculture.

And some analysts and investors say the magnitude of the recent price declines in copper and iron ore aren’t justified because Chinese authorities are unlikely to allow the country’s credit markets to completely unravel.

“Beijing has a huge influence over real demand and over how the financial markets are working,” said Daniel Rosen, a partner at Rhodium Group LLC, a research firm in New York. “The last thing Beijing wants to see is a crisis.”

Rising supplies also have played a role. Mining companies laid plans to ramp up output during the heyday of the commodities boom. Those plans are bearing fruit just as Chinese demand begins to moderate.

Copper futures Tuesday fell 2.6%, or 7.95 cents, to $3.0310 a pound on the Comex division of the New York Mercantile Exchange. The benchmark price for ore with 62% iron content at China’s Tianjin port rose 0.2% to $104.90 a metric ton, according to the Steel Index.

Analysts at Credit Suisse Group estimate that global iron-ore demand will rise 7.6% in 2014, while copper consumption will increase 4.5%. That is a slowdown from the growth rates of 8.3% and 5.7% in 2013.

Shares of mining companies have also been battered. BHP Billiton Ltd. BHP.AU +0.17% , the world’s third-largest largest producer of iron ore, fell 0.6% Tuesday and is down 5.4% year to date. Brazil’s Vale SA dropped 1.6%, bringing losses so far this year to 17%.

“You’ve got the credit issue in China…and you’ve got also reasonably high iron-ore [stockpiles],” said Jimmy Wilson, for iron ore at BHP Billiton, on the sidelines of a conference in Perth, Australia. “Traders have a view that the price is going to go down so they do everything they can to hold back” on buying.

Mr. Wilson said he believed iron-ore prices would rebound thanks to China’s steel output, which he forecast to rise to 1.1 billion tons in 2025 from 780 million tons in 2013.