China’s imports in March fell 1.4% y/y, beating market expectations and reflecting a marked improvement from a fall of 10.2% in the January to February period. Exports last month also posted a surprise surge, according to customs data, as the world’s second largest economy continues its recovery following three years of zero-COVID policies.

More specifically, China’s crude oil imports jumped 22.5% from March last year to 12.4mbpd, marking the highest monthly level since June 2020, and its soybean purchases were up 7.9% y/y to 6.9 million tonnes.

Accelerating growth in China is one of the reasons we continue to favor exposure to broad commodities, but we also see other supporting factors that will underpin the sector’s total return outlook of around 20% over the next 12 months.

A tightening oil market. Brent crude prices have risen nearly 20% since their March low as the market refocuses on fundamental tightness. Recent data shows renewed large on-land inventory drops of more than 30 million barrels over the past several weeks across the US, Europe, Singapore, Japan and Fujairah, suggesting that the market remained undersupplied. Iraq’s exports from the north have yet to resume, with 500,000bpd of oil output lost since 25 March. In addition, we think the voluntary production cuts by nine OPEC+ members should tighten the oil market further from May onwards.

Lingering climate and geopolitical risks for agricultural commodities. While Russia agreed to extend the Black Sea grain deal last month, the renewal covers only half of the intended period. The war also has a longer-lasting impact on output from Ukraine as farmers’ ability to prepare fields and plant seeds has been disrupted. Separately, the probability of an El Niño event by year-end has risen to 60%. Historically, this event has negatively affected yields for corn, rice, and wheat.

Improving outlook for industrial metals. China’s demand recovery for industrial metals has been slower than expected, with copper imports in March 19% lower than a year ago. But we expect the situation to improve as Chinese consumption enters a peak season amid Beijing’s pro-growth policy focus. We’ve recently raised our forecast for property sales this year following a strong March number, and we expect the country’s electrical network sector to grow 3.3%. Separately, supply challenges in South America should leave the copper market with a marginal deficit in 2023. Overall, industrial metal inventories are at structurally low levels and remain supportive for prices.

So, we maintain our most preferred rating on commodities in our global strategy, and recommend investors to take direct exposure. Downward-sloping curves offer roll gains, while higher yields have improved returns on cash collateral. Given the unique characteristics and drivers of individual commodities, actively managed strategies should enable investors to potentially boost their returns relative to risk.
Source: UBS