Horror Night for Commodities

As far as the ASX is concerned, the real issue from Tuesday’s global market slide wasn’t the way US investors in particular sold down Wall Street for a third session in a row, nor the data that triggered the drop, but the bath taken by commodity prices.

Iron ore prices slumped under $US100 a tonne for the second time this year (for 62% Fe fines, the key Australian export product). record LNG prices in Asia have also gone as prices drop more than 10% in two days. Thermal coal prices weakened as well.

After several days of strength in the wake of Saudi Arabia’s threat to cut production if prices continued falling, global prices for key crudes, Brent and West Texas Intermediate (WTI) did just that on Tuesday – in a big way.

But while the stronger than forecast US job openings and vacancies data worried investors and sent US bond yields and the greenback higher, as did stronger consumer confidence figures for August, the major issue for commodity prices was news of widespread Covid lockdowns across some of China’s biggest cities and industrial centres across on Tuesday.

Reuters reported “Metropolises from the southern tech hub of Shenzhen to southwestern Chengdu and the northeastern port of Dalian ordered measures such as lockdowns in big districts and business closures aimed at stamping out fresh outbreaks.” Over 50 million people are being impacted by the latest lockdowns and testing – 21 million in Chengdu in Sichuan alone.

Mainland China reported 1,717 domestically transmitted COVID infections for Sunday – 349 of these symptomatic and 1,368 asymptomatic. From more than 20 places that reported infections for Monday, Tibet, Qinghai and the drought-stricken province of Sichuan, of which Chengdu is the capital, accounted for the bulk of daily cases, according to Reuters. Hong Kong reported a further 10,000 cases – numbers are starting to rise again as controls have been eased.

These reports sent Chinese and Hong Kong share markets lower on Tuesday.

And the news from China didn’t help commodity prices as gold, copper and silver also fell along with prices of key energy products.

That in turn pushed ASX futures down nearly 60 points overnight Tuesday, meaning a weak start for major commodity stocks such as Woodside, Santos, Newcrest, BHP, Rio Tinto, Fortescue and Northern Star, Evolution Mining and a host of smaller miners.

Oil prices tumbled on fears that tighter monetary policy to fight inflation will dent the global economy and soften fuel demand and by fears Chinese demand will take a hit from the drought and the expanding Covid lockdown situations.

Brent crude futures for October settlement fell 4.95% to $US99.89 a barrel, after climbing 4.1% on Monday – the biggest increase in more than a month.

WTI prices dropped more than 5.5% to $US91.64 at settlement in New York. They traded just above $US92 a barrel in early Asian dealings Wednesday in Asia.

Gold prices fell as the precious metal continued to wilt in the face of the strong dollar, with spot gold down 0.75% at $US1,725.21 an ounce. Comex front month futures tumbled around 0.8% to $US1,736.10 an ounce. Silver fell more than 2% to $US18.16 an ounce while Comex copper dropped 1.8% to $3.54 a pound, taking a direct hit from the news from China.

Iron ore prices fell under $US100 a tonne on the SGX futures market with the price of 62% Fe fines delivered to northern China (typical Australian ore from the Pilbara) trading at $US97.25 on Tuesday night, down more than 8% from last Friday’s $US105.70 and the first time the price has been under $US100 a tonne since early July.

And thermal coal prices fell on the Newcastle market – down around 2% to 3% to just over $US407 a tonne for October delivery. Australian hard coking coal prices fell back under $US300 a tonne in Singapore.

And soaring LNG prices in north Asia turned tail and slumped 11$ or more to just over $US58 a million British Thermal Units from $US76.30 at the weekend.

US bond yields rose to 3.11% for the 10 year note, up 7 points on the day and reacting badly to the strong job openings data and solid consumer confidence. The Aussie dollar fell to just over 68.50 US cents as the greenback rose, and added pressure to commodity prices as well.

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