...The global driver of commodity demand has re-emerged
Scott Barlow, The Globe and Mail, Tuesday, Apr. 04, 2017
China’s demand for resources is such a dominant driver of commodity prices that it’s almost not worth looking at anything else to judge the future course of asset prices. The current spike in China’s imports is great news for Canadian equities and the loonie.
Most investors are aware that the Chinese economy is the world’s largest driver of commodity demand but the sheer scale is still astonishing. A 2016 report from the Financial Times noted that China accounts for half of the entire planet’s demand for aluminum, nickel, copper and zinc.
The accompanying chart [not included in this copy/paste] highlights the effects this has on base metals prices by displaying the extraordinarily close relationship between Chinese import growth and the S&P/GSCI industrial metals index. The high degree of correlation is not a new phenomenon – it’s been in place for the past decade.
The most recent change in trend occurred in January, 2016. Since that point, the year over year rate of growth in Chinese imports improved from minus 20 per cent to 38 per cent. The industrials metals index jumped from minus 20 per cent to 28 per cent year over year.
The jump in Chinese imports is not just good news for investors in mining stocks. The value of base metals, particularly copper, is also closely associated with the loonie. Bank of Montreal foreign exchange analysts Greg Anderson and Stephen Gallo have written that copper prices, not oil, are the best long term indicators for the Canadian dollar.
The second, lower chart [not included in this copy/paste] shows the growth path for both metals prices and the domestic currency. As with the first graphic, the similarities in trend are both well established and long term.
The chart uses monthly results. The last data points suggest that if metals prices remain elevated, the recent weakness in the loonie may be overdone.
Canadian investors should take any indications of change in Chinese import growth seriously – it has a direct and powerful effect on portfolio values.
http://www.theglobeandmail.com/globe-investor/inside-the-market/chinas-import-growth-is-great-news-for-canadian-equities-and-dollar/article34578207/?reqid=2345ffd5-7ca5-4293-b12f-c65d4110d269
