China may save commodities from equities’ fate: Clyde Russell

New York crude dropped 7.2 percent in August,while copper slipped 5.7 percent,making them as bad as,or worse than,the 5.7 percent decline in the U.S. equity benchmark S&P 500 Index.

And it’s not just an August story. Crude is down about 25 percent from its high this year in April,while copper is about 11.3 percent lower than its February peak. The S&P 500 has dropped about 14 percent since its April high.

Of course,oil and copper aren’t the only commodities open to investors,but they are probably the two best indicators for economic growth.

Corn has defied the rest of the commodity slump,gaining 13.8 percent in Chicago in August,because of deteriorating crop forecasts.

And,of course,gold is continuing to shine,up 12.1 percent in August and 35 percent this year. But in some ways,gold is now the anti-commodity as a bet on the yellow metal gaining is really a bet that everything else is stuffed.

What has been marked about commodities is that in contrast to their equities counterparts,many analysts in the field remain relatively bullish.

The case for commodity gains now appears to rest on two less-than-solid pillars: ongoing demand from China and no recession in the United States and Europe.

The Chinese pillar faces some stern tests of strength this week,with the release of August import and export data on Saturday.

This appears to be shaping up as the last straw for those still hopeful that Chinese demand will drive price gains. If oil and copper imports don’t impress,this could break the back of the commodity bulls.

So what would be impressive numbers?

Looking at oil,the July numbers showed China’s crude imports hit a one-year low on a daily basis of 4.58 million barrels a day for a month total of 19.43 million tonnes.

It would take a reading of closer to 21 million tonnes for August to convince investors that oil demand remains strong in the world’s second-largest user of the fuel.

Given that the oil price has been declining in recent months,the chances are that imports will have risen in August,as analysis shows the Chinese tend to buy more in the months after the price drops.

For copper,imports reached a six-month high in July,gaining 9.5 percent from the prior month.

Whether such a performance can be repeated is largely dependent on whether Chinese buyers thought the arbitrage between London and Shanghai prices was attractive enough.

On a dollar basis,London prices plus the 17 percent Chinese value-added tax were above those in Shanghai for June and July when cargoes would have been booked,but were around the same level as prevailed in May and June when July cargoes were arranged.

Interestingly enough,the arbitrage turned positive in August,making it more likely copper imports will grow in the fourth quarter.

On the economics side,the official Chinese PMI edged up to 50.9 in August from 50.7 in July,indicating manufacturing growth remains solid,likely expanding at a double-digit rate.

But the impact of higher interest rates and inflation might well weigh on China’s demand for commodities and encourage ongoing use of stockpiles to feed domestic demand rather than imports.

While it may still be the most likely scenario that Europe and the United States can stave off recession by wallowing in low growth for the rest of the year,the China growth scenario needs a kick from this week’s import data to be sustained.

Clyde Russell is a Reuters market analyst. The views expressed are his own.