International Economic Week In Review: It’s A Brave New Policy World

From a policy perspective, the decline in Chinese demand and the relative over-supply of commodities within China adds downward pressure to a variety of commodities.  This situation is likely to continue.  Last week, Bloomberg and the FT both noted the weak situation in the steel market:

China’s mills — which produce about half of worldwide output — are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.

Medium- and large-sized mills incurred losses of 28.1 billion yuan ($4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent in September on-year, it said.

Signs of corporate difficulties are mounting. Producer Angang Steel Co. (ANGGY) warned this month it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. The company’s Hong Kong stock has lost more than half its value this year. Last week, Sinosteel Co., a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.

When steel weakness is combined with the decline in oil prices, the net impact on commodity prices is very large as shown is this weekly chart of the DBC, the ETF tracking stock for the commodities complex:

Overall commodity prices dropped ~50% from their post-recession high. This decline is a primary reason for weak inflation at the international level – a situation that is confounding developed market central banks.  In a speech several weeks ago, Fed President Brainard placed this commodity price weakness – typified by the Chinese steel experience — into a broader perspective: