Knowing how a country uses commodities is a key part of commodity trading. It’s easy to look at a country like the United States and see that they are heavily dependent upon oil, but figuring out the price of a barrel of crude from this information is not quite as easy. Once you take into account that oil is being stockpiled in the U.S. and that there are several companies located in this country and in friendly nations like Canada are pumping out more oil than ever, you can see why crude is dropping in price. It’s a rare commodity, and it’s in high demand everywhere, but the current supply outweighs this demand, and prices have stagnated. Experts think it might be after 2017 before prices stabilize.
The U.S. is the world’s biggest economy, but when it comes to population, it is not the biggest. This distinction belongs to China, and as such, they have a very different set of consumer needs. Now consider the fact that they are the world’s second largest economy, and you suddenly have a situation where China’s economy has the power to make huge moves around the world, especially when it comes to commodities. China has a huge amount of land, and much of it is still developing, which gives the nation a big need for raw building materials. Steel, copper, and others like this are musts for the Chinese economy to keep growing.
The current situation in China has made this expansion difficult, though. With a floundering business environment and a hurting stock market, it’s been tough for companies (and the government) to purchase the raw materials needed to keep growing. As a result of this, short term growth for many types of commodities has been hurting. Short term aluminum futures have dropped recently, as has steel. Steel has seen perhaps the most dramatic fall of all, watching price per ton drop from almost $500 to about $100. Binary options traders that have never bought or sold commodity futures in their lives have profited big from this action, simply because the decline has been so steady and so predictable. Iron has also seen declines, although they haven’t been as sudden or as newsworthy as steels. The unfinished product dropped from about $70 per ton at the beginning of 2015 to its current price at just under $40.
Much of this decline is simply because of the slowdown that China’s economy has seen. There is a need, there’s a limited supply, too, but the demand for the commodities is slowing because Chinese companies cannot purchase the same amount that they once did.
The key to trading these commodities is to see what the current situation is, and then figure out how long it will last. This is unclear, especially because the Chinese currency, the yuan, has been named to the International Monetary Fund’s reserve currency basket. This will go into effect next October, and when that happens, the Chinese economy is likely to get a big boost. This move is also likely to help drive up stock prices as international investors attempt to take advantage of the still cheap prices with the weaker currency. For those looking to trade steel and other building commodities, it’s important to watch what the yuan does, what the Shanghai Composite Index does, and then figure out what the correct move for steel (et cetera) is based upon this movement. All the while, keep an eye on the basic technical indicators to perfect your entry and exit points. This is certainly a complicated strategy, but the accuracy of your trades will be improved as a result of this.