Commodity prices have had a year to forget. Weighed down by a combination of slowing demand from China, subdued economic activity elsewhere and a renewed burst of US dollar strength, they’ve been under constant pressure, at least until recent weeks.
While many predict grim times for commodities and, as a consequence, commodity producers in the years ahead, perhaps the bearish headwinds that have hammered prices over recent years may be about to end.
Although it’s only an anomaly at this point, the chart below might offer some much needed hope for the beleaguered sector. Courtesy of CBA commodity analysts Vivek Dhar and Kofi Mensa, it tracks Chinese floor space under construction dating back to 2012.
Clearly, there was a massive surge in floor space under construction recorded in September, jumping to nearly 250 million square metres, an increase of nearly 100 million square metres on the month before. While they remain cautious on what this means – it’s only a one-off for the moment – Dhar and Mensa suggest that demand for property may be improving, and hence the outlook for commodities.
“The lag of 5 months between China’s pickup in property sales and last month’s sharp rise in property starts we see as plausible, but the uptick in further downstream property indicators does suggest more robust property demand than we expected,” the pair wrote in a research report published following the release of Chinese Q3 GDP yesterday.
“It also does suggest real property construction is happening and potentially signals that the inventory drawdown in China’s property sector may not be as severe as initially thought. We await more data to confirm this isn’t just a one-off related to data distortion. If China’s property construction volumes continue to improve, we may potentially see China’s commodity demand and prices recover in the near term.”
The chart below, also supplied by CBA, shows that Chinese property sales volumes ticked higher in May on a 12-month moving average basis, some five months before the surge in floorspace under construction occurred in September.
Although Dhar and Mensa suggest that the likelihood of a rebound in commodity prices is looking slimmer as China’s commodity intensive sectors slow, they note that “the uptick in China’s property construction volumes does provide a glimmer of hope.”
Given the year that commodity markets have endured, many will be hoping that the glimmer will grow to something more substantial in the months ahead.
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