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For years, commodities investors had it easy–just buy anything that China was buying. Now, with China’s growth slowing and demand for raw materials easing, investors are being forced to work a bit harder.
Some investors have turned away from commodities that are heavily dependent on Chinese demand, such as base metals, cotton and soybeans. Others are searching for areas that will continue to grow no matter what happens in China, such as the U.S. natural gas market. And some are simply getting out of commodities completely.
These moves mark a significant change in the commodities market. China’s seemingly insatiable appetite for raw materials was a crucial driver behind the commodities boom of the past decade, propelling enormous price gains for everything from crude oil to cotton. Now, investors have to figure out which commodities are most vulnerable as the world’s second-largest economy shifts down a gear.
“The strategy of simply buying what China needs is no longer valid,” said Na Liu, a China strategy advisor to Scotia Capital and founder of CNC Asset Management Ltd.
Mr. Liu figures the commodities that are in oversupply are most at risk. He is telling clients to stay away from aluminum, zinc, nickel and steel. But he says a shortage of copper and grains will help bolster prices.
Others are focused on demand.
China is the dominant contributor to global demand growth for industrial materials and many agricultural products, such as cotton and soybeans. The country now accounts for 42% of all the base metals used around the world. Without China, the rest of the world’s demand for aluminum, copper, lead, nickel, tin and zinc would have fallen 2.6%, instead of rising 2.3%, in the second quarter this year, according to Marina Rousset, a researcher at the International Monetary Fund.
But the country’s impact in markets such as crude oil and gold is less pronounced. China accounts for less than 11% of global crude oil consumption, a distant second to the U.S., which uses over 20%, according to the International Energy Agency. In the gold market, China and India are neck and neck, with India taking in more gold during the second quarter, according to the World Gold Council.
Jeffrey Sherman, a portfolio manager of commodities at DoubleLine Capital LP, which oversees $45 billion in assets, is locked in on those numbers. For that reason, he is bearish on base metals, such as copper and lead. The fund has no exposure to industrial metals, such as steel and iron ore, and is considering putting on bets that prices will fall if global economic conditions continue to worsen.
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