Is China causing weakness in commodities?

A commentary from Edward Jones suggests that China may be at the root of recent declines in commodity prices

Stay away from mining and metals.

That’s the gist of a recent commentary piece published on the Edward Jones website, which suggests that economic difficulties in China have redounded to decreasing prices, from oil and coal to copper and iron ore.

“Over the last 15 years, the world has geared up to supply China's surge in infrastructure and property construction,” the piece explains. “Metals and mining companies have invested heavily to meet the demand, undertaking huge mining projects globally.”

This, according to the company, has resulted in accelerated production that is pushing supply into surplus territory. “Although China's economic growth has been slowing over the past few years, basic materials companies are still in the process of creating new supply in some commodities such as, iron ore, copper and steel-making coal.”

Another contributing factor is slowing global growth. “While the U.S. economic outlook remains bright, global economic growth has weakened. This is important because developing markets make up most of the demand for commodities, especially China,” the piece says.

The Chinese economy’s ongoing transition from infrastructure-driven to consumption-driven growth has caused decreasing demand for commodities. This – coupled with excess supply pressures – means that “the operating environment for some commodity producers could remain challenged for the foreseeable future”.

“Given our cautious outlook about over-supply situations in iron ore, copper and steel-making coal — which we believe will continue to create a negative pricing environment — we recommend avoiding companies with direct exposure to these three commodities,” the piece concludes.

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