Commodities Jump as China Begins Easing Zero-Covid Policies

By Will Horner and Yusuf Khan

Commodity prices jumped higher Friday on a combination of China taking its first steps to ease Covid-19 lockdowns and signs that the U.S. Federal Reserve is winning its fight against rampant inflation.

Commodities sensitive to Chinese demand, from oil to industrial and precious metals, were sharply higher Friday, adding to recent gains that came as rumors swirled that Beijing was considering relaxing the strict measures that have dragged on commodity demand.

In mid-morning trading in Europe, Brent crude, the international oil benchmark, was up 3.1% to $96.59 a barrel and taking its gains for the month to 4.1%. Three-month forward copper prices on the London Metals Exchange rose 2.2% to $8,440 a metric ton and aluminum added 3.8% to $2,411 a ton, taking their monthly gains to 13% and 8%, respectively.

China's Politburo Standing Committee set out new rules Friday that it said would seek to minimize the negative impact of lockdowns on the nation's economy. Bans on airlines found to have brought infected passengers into China were scrapped while quarantine for travelers was reduced. Measures isolating China's neighborhoods and mass testing measures were also scaled back.

While the measures are small, they come despite the nation's cases surpassing 10,000 and represent the beginning of the end of China's zero-Covid policies, suggesting the weakest point of China's commodities demand has passed, analysts say.

"The changes...seem aimed at both reducing the country's global isolation and easing the impact of virus mitigation measures on the ground," Helge Andre Martinsen, senior energy analyst at DNB Markets, said. "This represents a significant calibration of the country's zero-Covid policy."

The new measures look likely to come just as Western commodity demand looked set to weaken and global commodity inventories are "critically tight," analysts at Goldman Sachs wrote in a note published Thursday.

"With tight commodity markets going into winter and a continued high risk of Russian disruption in crude, the new risk of an earlier or stronger reopening in China is shifting investors' behavior from selling rallies to buying dips and covering shorts," they said.

Expectations for rebounding industrial activity would likely encourage Chinese buyers to begin restocking industrial metals after the nation's metals inventories have been depleted to a 15-year low, the bank says. The Chinese stock builds--if on the same scale as pre-Covid levels--could amount to 850,000 tons more aluminum demand and 511,000 tons more copper demand, next year, Goldman Sachs says.

Natural gas is one of the few commodities not to gain on the news, as a seasonal glut in Europe continues to drag on prices. European benchmark gas prices are down 7.6% Friday at $104.78 a megawatt hour and are down 15% for the month, as a milder-than-expected start to the European winter adds to a surfeit of gas which is dragging on prices.

Still, an easing of China's lockdowns could add to factors expected to drive gas prices higher as it would likely mean more demand for gas this winter, just as European nations begin drawing down their stockpiles.

China's announcement comes after U.S. inflation data Thursday was weaker than expected, spurring expectations that the Federal Reserve would ease its cycle of interest rate hikes and prompting a sharp rally in risk assets.

The inflation data weighed on the U.S. dollar, offering additional support to commodities. The ICE Dollar Index, which tracks the greenback against a basket of other currencies, tumbled 2.1% Thursday and was down a further 0.9% Friday. A lower dollar can support demand for dollar-denominated commodities among investors holding other currencies.

One of those beneficiaries so far has been gold. Prices this week are up 5.6% to $1,764.70 a troy ounce, amid softer inflation figures in the U.S. and a promise of more buying in Asia. Gold prices have been hit hard by dollar strength this year, with investors favoring holding dollars or government bonds over the precious metal--in turn pulling down prices. Prior to this week, prices were down more than 9% for the year despite the metal's typical reputation as a hedge during periods of economic turmoil.

However, a record level of central bank buying has given a floor to prices according to Ole Hansen, Head of Commodity Strategy at Saxo Bank saying that the "market is responding to the fact [central banks] are giving a natural level of support." This, coupled with potentially more physical buying in Asia could help spur prices higher toward the end of the year, Mr. Hansen said.

While a positive first step, analysts have been forecasting a full end to China's Covid-19 measures will likely come sometime next year. UBS expects a permanent end to strict measures to come in the third quarter of next year, while Goldman Sachs expects such measures in the second quarter.

Write to Will Horner at [e-mail] and Yusuf Khan at [e-mail]

(END) Dow Jones Newswires

11-11-22 0711ET