June 4, 2012

China's commodity market may go lower in June

The commodity market of China may keep declining in June following an overall drop in May with the instabilities in macro-economy, the Xinhua-run Economy Information Daily reported on Friday (Jun 1).

The global commodity market suffered a plunge in May as Greece's potential exit from the eurozone pushed many investors to withdraw their money from the capital market. Furthermore, market sentiment remains pessimistic about the Europe debt crisis this month.

Currently, investors are widely concerned that if Greece's issues cannot be solved, it will trigger a new round of global financial crisis. Analysts point out that the debt crisis contagion seems to be spreading to Spain, an event which would be likely to be strongly negative for the European and US stocks and even the global commodity market.

Besides, the US dollar index continues to go strong and this will in turn press down the USD-denominated commodity prices and increase the possibility of a further decline of commodity prices.

In addition, China's disappointed economic data also raised worries about possible hard landing of China economy. Che Hongyun, an analyst with Galaxy Futures, predicts that the Chinese government's stimulus policy strength will become clear in June.

The staple commodity prices displayed a continuous slide in May and farm produce also presented an overall fall. The most actively traded September corn contract on the Dalian Commodity Exchange touched a 17-week low of RMB2,346/tonne. Cotton prices dropped significantly and even dived to the level before September 2010.

Cui Jiayue, a researcher with Green Futures, says that this round of decline of farm products futures was mainly influenced by risks from the macro-economy. Then again, wheat, corn, and soy futures rose sharply in the earlier period and thus correction was always likely.

However, it is noticeable that agricultural commodity futures do not belong to those products of strong cyclical characteristics, and its financial attribute is thus slightly weaker. This suggests that after mass short selling, agricultural products prices may resist the continuing down-cycle of the more volatile futures and go stable in the coming period.

"Grain futures including wheat, corn, and soy will likely show a stronger resistance in a bearish market underpinned by rigid demand while cash crops such as sugar, cotton, and natural rubber may obtain less support as global economic depression reduces demand," Cui adds.