Renewed surge in Chinese demand still seems unlikely

We are sceptical that commodity demand growth in China is about to reignite, despite this week’s cut to the required reserve ratio (RRR) for most banks and data showing surprisingly strong imports of key commodities in November. After all, both developments are in stark contrast to the ongoing woes in China’s commodity-intensive construction sector, with ratings agency Fitch determining on Thursday that major property developer Evergrande is now in default. Together with the fact that there still appears to be little appetite among policymakers for a sharp rebound in credit growth, we continue to expect growth in China to slow over the coming year. In turn, this is a key reason why we forecast that most commodity prices will fall back by end-2022. The release of China activity data for November (Wednesday) and euro-zone flash PMI data for December (Thursday) will be the main events for commodity markets next week. We think the China activity data will underwhelm, which would add weight to our view that last month’s upturn in imports is a misleading signal of underlying demand for commodities there. Meanwhile, we think that Omicron-related caution will have weighed on the PMI data in the euro-zone which, together with the downturn in mobility indicators there, would bode especially ill for oil demand.