When it comes to an economic slowdown, not all commodities are equal.
China's policy tools are blunt, and the slowdown in the world's No.2 economy is hitting commodities across the board. But sharper falls in some areas than others reveal differences in supply-demand dynamics that will remain even after policy shifts back into neutral mode.
Take steel. The construction sector, which accounts for half of steel consumption, is among the most vulnerable to a policy-induced slowdown. Steel prices have fallen 4.4% in the last two months, while iron-ore import prices have slid 7%. Last week, 23 steelmakers slashed product prices. With mills across the sector running flat out, partly to try to beat a power crunch that is expected to worsen as the summer drags on, there are further price cuts on the way.
Copper is also plagued by oversupply. In the last six months, domestic copper futures have fallen 6.5%, the most visible casualty among the metals of the government's war against inflation. Some of this is the effect of slower automotive demand, which has outweighed the positive impact of continued investment in the national grid. But record-level inventories, the result of imports by traders not linked to real demand that have flooded the domestic market, are also part of the picture.
The dynamics in the market for agricultural commodities are different. Even as China's purchasing managers' index data shows the manufacturing sector slowing, agricultural demand is underwritten by China's hungry households. China needs more food and that is coming up against limited arable land, wealth-driven diet changes and parched natural resources.
No surprise, then, that prices for agricultural commodities have been more resilient than for their industrial cousins. Import quotas and—despite press reports of droughts and floods—stable production, are keeping prices stable. Corn futures are down just 0.4% in the last two months, while soybean prices have fallen 1.5%.
Cotton is the exception to the agricultural rule, with the sharpest fall in prices. Like other commodities, it is stumbling as a result of the application of broader economic brakes. But like their counterparts in the steel sector, textile mills also created their own problem. Producers that took advantage of a commodity boom in 2009 and 2010 to stock up on inventory were forced to dump stocks late last year amid rising inflation and projections for resilient output. The result? After rising sharply last year, prices have fallen more than 30% since November.
The current prognosis that demand will pick up in the fourth quarter in response to receding inflation and a looser credit environment. That will support commodity prices generally.
But whether policy is or loose or tight, market dynamics make a difference. This tightening cycle is most likely to wash out inventory-heavy sectors like cotton and steel. It is more likely that agricultural commodities, particularly corn, will keep afloat even with the receding tide.
Write to Chuin-Wei Yap at Chuin-Wei.Yap@dowjones.com