Commodities Recover Losses As China Halts Trading

Amid the brutal selloff in China's stock market in the past few days, commodities from oil to metals to iron ore plunged to multiyear lows before bouncing back at the end of the week. Almost all of the major industrial metals fell on the London Metal Exchange except for lead.

Copper took the toughest hit as it touched a six-year low of US$5,240 [$7,025] per tonne right before rebounding as Beijing managed to halt panic selling in Chinese equities. Similarly, iron ore fell 11 percent in just one day, while Brent crude oil fell more than six percent to US$58.22 per barrel. Nickel, on the other hand, posted its biggest two-day rally last Thursday since 2012, levelling the prices of industrial metals for the time being. However, the metal still posted losses of 6.2 percent this week.

The commodity and stock market decline showed just how much commodities depend on growth in China, largely regarded as the world's largest commodity consumer. As stocks slumped, it prompted a scramble to cover other positions in commodities, or the additional placement of bearish bets to take advantage of the weakening sentiment.

However, according to Michael Hsueh, analyst at Deutsche Bank, the recent commodity slump cannot be accurately described as a worsening physical demand for commodities, but more of a financially driven falloff. "One possible causal link could be the various restrictions against selling Chinese equities which, in our view, mean that commodities can serve as a proxy hedge," he said. "Additionally, liquidation of commodity holdings could fund margin calls on the Chinese equity market exposure."

Still, many fear that the stock market slump will further contribute to China's economic slowdown, hence leading to lower demand for commodities. Such a thing is happening to nickel, as the biggest commodity banks have been slashing price forecasts for the said metal due to questionable demand. Morgan Stanley has cut its Q3 nickel price forecast by 12 percent to US$13,228 per tonne, while JP Morgan said that it would be "more comfortable with US$10,000 nickel" than US$17,000 per tonne as earlier predicted.

While the near future does not look good for many metal miners, those that are looking to start production in the medium term might fare better, such as Russian nickel copper sulphide miner Amur Minerals Corporation (AIM: AMC). After receiving its production license from the Russian government, Amur Minerals is already preparing for the next phase of infill drilling and metallurgical test work for its flagship Kun-Manie project. This process can take time, but the company has enough cash to burn during this period, as well as an impressive no-debt record. With the Kun-Manie project touted as one of the largest nickel deposits in the world, its potential is huge in the long term.

After all, analysts predict that nickel prices will eventually recover come 2016, as China will soon find itself needing ore inventories for its stainless steel production. According to Scotiabank's Patricia Mohr, "The Chinese are going to find their inventories of ore to make nickel pig iron are going to start to tighten. And so next year, we would still have nickel prices moving higher."

Contact the writer: a.lu@ibtimes.com.au