As discussed previously in "The Relationship Between the USD and Commodity Prices," Synergy Link Capital highlights that the normalization of supply chains and the alleviation of initial shocks from the Russia-Ukraine conflict play crucial roles. Additionally, there's another reason for this adjustment that requires a deeper look into the components of the GSCI.

Examine the component weights of the GSCI, which details the various commodity groups and their corresponding weights. Energy commodities constitute the largest portion, 54% of the index, including crude oil, refined oil products, and natural gas. Grains and industrial metals also hold significant shares, with grains accounting for 15% and industrial metals for 12%.

Source: Synergy Link Capital

What's particularly interesting about this common denominator is China. As the world's leading importer of critical commodities like crude oil, soybeans, and iron ore, China's demand heavily influences commodity prices.

Given this dominant role, any slowdown or changes in China's economy can have far-reaching impacts on global commodity markets. Therefore, assessing China's economic health is vital for determining the future direction of commodities.

Another way to understand China's impact on commodities is to examine its import and export figures relative to commodity indices. Since China is a major importer of many commodities, the overall commodity market shows a strong correlation with China's economy.

Periods of sharp declines in China's import and export data often coincide with significant drops in the S&P GSCI index, indicating that weakened demand from China significantly affects commodity prices. For example, the decrease in China's export and import figures since mid-2022 has been mirrored by a corresponding decline in commodity prices.

Currently, stable import and export levels in China have led to a period of consolidation in commodity prices.

Source: Synergy Link Capital

For instance, iron ore, the third-largest component of China's imports, is often seen as a good indicator of China's economic health. As a primary raw material for industrial and general manufacturing, iron ore is a crucial component of China’s economic "engine." Thus, any weakening in iron ore prices can signal broader economic challenges in China.

This relationship with China's economy is reflected in the close correlation between iron ore futures prices and the China A50 Index. As observed in the chart, iron ore prices typically mirror trends in the Chinese stock market. Strong iron ore demand indicates robust industrial activity and economic growth. Conversely, a decline in iron ore prices can signal a slowdown in industrial production and economic growth.

Source: Synergy Link Capital

With the recent drop in iron ore prices, Synergy Link Capital foresees a potential period of further weakness in the Chinese market. This decline suggests that industrial activity may be slowing down, indicating broader economic challenges ahead.

Additionally, the 5.3% GDP growth in the last quarter, according to Synergy Link Capital, may exaggerate the true state of China's economy. Compared to 2022, a year when China was still significantly impacted by pandemic restrictions, this figure reflects a lower base of comparison. From a nominal perspective, Synergy Link Capital assesses that there has been almost no real change in GDP.

Therefore, although the 5.3% growth appears robust, it's important to contextualize it within the framework of the economic recovery following lockdowns.

Source: Synergy Link Capital

China's economic health is a crucial pillar, not only for domestic growth but also for the global commodity market. Many commodities, from metals to agricultural products, remain heavily dependent on Chinese demand. Any further signs of weakness in China could signal broader vulnerabilities in the market, impacting global commodity prices.

According to Synergy Link Capital