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Chief economist update: Good as gold

The coronavirus pandemic has affected lives, livelihood and financial markets around the world.

Commodity markets were no exception. S&P GSCI commodity price index dropped by 48.7% to a 17-year low of 228.24 points in April from this year's high of 444.63 points recorded in February.

Even gold fell by 11.3% between February and March before re-asserting its safe-have quality and rallying by 18.6% to date. In comparison, the commodity price index remains 22.5% lower so far this year.

Surprising as it may be, gold's expected outperformance is nearly matched by that of iron ore - an industrial metal whose price positively correlates with economic activity (or more accurately, with Chinese economic activity).

According to "China accumulated a majority of the global iron ore imports in 2019, with a 69.1 percent share of total global imports."

Thus, iron ore prices dropped by 17.4% from a high of US$94.83/tonne in January to US$78.33/tonne in February soon after China locked down Wuhan and other cities in Hubei, before rebounding strongly following central government's decision to lift the lockdown on April 8.

To date, iron ore prices have rallied by 38.4% from this year's low and are 15.4% higher compared with 2020's opening trade of US$92.58/tonne.

China's return to normality - plus accommodative monetary and fiscal policies - should underpin improved activity with a consequent rise in steel production, and therefore demand for iron ore.

Annual Chinese steel production growth has accelerated by 0.2% in April and by 4.2% in May, after dropping by 1.7% in March.

This comes amid recent statistics highlighting the recovery in business activity: industrial production grew by 4.4% in the year to May - the third straight month of improvement after a 13.5% fall in February; the contraction in retail sales has slowed to -2.8% from February's -20.5%; so with fixed asset investment whose annual rate of decline sequentially eased to 6.3% in May from 24.5% three months before.

Forward indications are also positive. The Caixin China PMI surveys have returned to readings indicating expansion - composite (55.7 in June from a record low 27.5 in February); manufacturing (51.2 from 40.26); services (58.4 from 26.5).

The supply side of the equation also provides a positive underpinning for iron ore prices. While a number of economies have started to re-open and loosen restrictions, disruptions to supply chains could continue to linger until the coronavirus pandemic is totally contained.

Read our full COVID-19 news coverage and analysis here.

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