Industrial commodity prices have come under sharp pressure after China, one of the world's biggest consumers of metals and fuel, had its credit rating downgraded by Moody's.
Iron ore, copper, nickel and coal prices were all lower after the rating agency downgraded China's long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3. Moody's raised its outlook on China, however, to stable from negative.
Ratings from the Big Three
This was the first time Moody's has downgraded China's sovereign debt rating since 1989.
The big three rating agencies, Moody's, Standard & Poor's and Fitch, all have different ratings on China's debt – S&P has a AA- rating with a negative outlook, while Fitch's is A+ with stable outlook.
As can be seen in the chart below, the action by Moody's brought its rating into line with S&P, while Fitch is one notch below the other two.
However, China's debt remains rated investment grade by all three agencies.
China’s debt issuance expected to rise
The move by Moody's reflects rising concerns that China's export-reliant economy will slow in the coming years as government reforms rebalance the economy to improve domestic demand.
"The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows," the agency said in the statement accompanying the downgrade.
Moody's expects China's debt issuance to increase in the coming years as its financial authorities provide monetary stimulus to the economy as it slows.
"The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets," Moody's said.
It continued: "Such stimulus will contribute to rising debt across the economy as a whole."
China’s growth slows
Industrial commodities are particularly sensitive to events in China, and slowing growth has hit the sector hard in the last six years.
Since 2010, when it recorded annual growth of 10.6%, China's economy has avoided a hard landing but has steadily slowed and in 2016 annual gross domestic product growth was down to 6.7%.
By western standards, 6.7% growth would appear stellar, but given China's history of high growth rates – averaging 9.9% between 1979-2010 – anything below 8% has lately been seen as less than pedestrian.