Commodity prices have fallen sharply in recent weeks amid concerns over slowing economic growth in China, according CME Group. The Bloomberg Commodity Spot Index, which tracks prices for 23 raw materials, has dropped over 9% since mid-April.

China Impact

Much of the decline has been driven by worries over weakening demand in China, the world’s largest commodity importer. With China’s economy slowing under pressure from COVID-19 outbreaks and a distressed property market, demand for raw materials like copper, iron ore, and crude oil is expected to soften. This has put significant downward pressure on global commodity prices.

“China accounts for over 50% of global demand for major commodities like copper, steel, and coal,” said Michael Smith, commodities strategist at ABC Bank. “Any hiccup in China’s economy will have an outsized impact on commodity markets.”

In April, China’s manufacturing PMI fell to 47.4, indicating a contraction in factory activity amid tight lockdowns. This has raised concerns over industrial commodity demand in the near-term. Shanghai, China’s main commercial hub, has been under a strict COVID-19 lockdown since late March.

Supply Worries Ease

At the same time, worries over tight supplies have eased recently. Fears of major disruptions to commodity exports from Russia have somewhat subsided. While Russia is a key supplier of oil, gas, metals, and crops, sanctions have so far avoided directly targeting these flows.

“Commodity markets were initially spooked by the potential for Russian supply shortages, but these worst-case scenarios have failed to materialize so far,” said Jane Wells, commodity analyst at XYZ Capital.

The easing of supply constraints has shifted focus back to demand-side risks. With China’s economy losing momentum, the balance of risks has turned more bearish for commodities.

Oil Hit Hard

Crude oil has been among the hardest hit commodities, with Brent prices falling over 15% from March highs to around $100 per barrel. Demand headwinds from China and prospects for more Iranian supply have pressured prices.

“Oil markets are facing the dual headwinds of China weakness and a potential Iran nuclear deal,” said Wells. “Without the geopolitical risk premium from Ukraine, oil looks overvalued at $100 and has room to fall further.”

Agricultural commodities like wheat and corn have also declined on improved supply prospects. Plus, a strong U.S. dollar has made commodities less affordable for buyers with other currencies.

The recent pullback does not change the longer-term bull case for commodities amid still-tight supplies and resilient demand. However, China’s faltering economy poses a near-term risk that could lead to further volatility and price declines.

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