Analysis-Reality bites: China’s meddling cools down but can’t reverse high commodity prices

SHANGHAI (Reuters) – A series of measures taken by Chinese authorities to contain soaring raw material costs has had a fleeting effect, leaving the world’s largest manufacturing base in the face of the harsh reality of commodity costs. significantly higher inputs for the foreseeable future.

FILE PHOTO: Containers are seen at the Yangshan Deep Water Port in Shanghai, China October 19, 2020. REUTERS / Aly Song / File Photo

China’s huge manufacturing industry, population, and rapidly growing economy mean that its commodity needs are particularly large and far exceed domestic production. The recent surge in prices of everything from copper to coal has pushed up the country’s producer prices the most since 2008 and delayed its recovery from the coronavirus pandemic.

As major economies in Europe and North America also recover from coronavirus shutdowns, competition for raw materials is only expected to intensify, limiting the near-term decline in prices.

“The recent measures taken by the Chinese authorities have succeeded in skimming off part of the prices of raw materials,” said Frederic Neumann, co-head of the Asian economy at HSBC. “Basically, however, commodity prices are determined by global supply and demand, which Chinese authorities can only influence indirectly.”

China imports about half of all key metals, a third of all crops shipped, and nearly 20% of global oil shipments.

But in addition to an unparalleled demand weight, there is an acute sensitivity to volatility in commodity markets and supply chain disruption, forcing policymakers to act whenever market conditions arise. threaten China’s industry or critical population.

The Chinese cabinet called the price spike “unreasonable” at a meeting on May 19, saying it would strengthen its management of raw material supply. He called for a crackdown on “malicious trade” and urged charcoal producers to increase production.

Beijing’s main planning agency, the National Development and Reform Commission (NDRC), conducted two separate investigations into the coal and iron ore markets, while China’s secret strategic storer, the Administration national food and strategic reserves, announced scarce sales of key metals aimed at closing supply gaps and cooling prices.

The actions, including a new NDRC announcement of new rules requiring more transparency and consistency from those responsible for setting commodity prices from August, are the most comprehensive market intervention in the world. Beijing to date and report a whole-of-government approach to managing commodity prices.

But the prices of the most critical inputs – including Shanghai’s coal and aluminum and zinc – are still perched near multi-year highs.

“You have seen a drop in the prices of some commodities … This tells you that (the measures are) effective, at least in the short term,” said Shan Hui, chief economist for China at Goldman Sachs Asia, who agreed that more in the longer term, a comprehensive supply and demand analysis was needed.

IGNITION OF INFLATION

The main concern of policymakers is that rising commodity prices accelerate inflation and erode the purchasing power of consumers and the competitiveness of manufacturers, a risk highlighted when a key producer price index has reached. its highest level in 12 years in May.

Although the pace of ex-factory price growth in China slowed slightly in June with the entry into force of Beijing’s measures, the 8.8% year-on-year increase remains uncomfortably high for most manufacturers with a limited room for maneuver to pass on higher costs in a context of fierce competition.

Some economists argue that the higher costs are transient and will subside as supply chains recover from the health crisis, but others point to limited global production, slow ramp-up times for new operations mining and growing demand as economies around the world recover.

Wu Shiping, an analyst with Tianfeng Futures, said prices for coking coal, a key ingredient in steelmaking, were high due to a supply shortage.

“For iron ore, shipments from major miners have fallen and the futures market is tracking spot prices,” he said.

NOT Reassuring

The results of Beijing’s efforts so far are unlikely to reassure those hoping authorities can cap further price hikes.

Take coal for example – essential to generate electricity for most factories, offices and homes. When Beijing announced its investigation on June 18, Zhengzhou thermal coal futures had not long hit a record high above 900 yuan per kilogram, gaining 30% in just 6 weeks.

Despite falling to less than 800 yuan as warnings from policymakers and higher trading fees have reduced the market, prices are back near their highs and are expected to remain strong as warm weather stimulates demand for air conditioning until ‘in autumn.

As the price of iron ore, which powers the country’s gigantic steel industry, has fallen by more than a fifth from May’s record high, this move is in part due to a reduction in the country’s steel production. to reduce emissions.

Open interest – a measure of the number of participants with positions in the market – is still at high levels, suggesting that speculative money was not a major driver of the market and that most position holders are comfortable with the in-depth review.

Meanwhile, sales of state reserves have had little significant impact on benchmark copper, aluminum and zinc prices, which remain around 30% above year-level levels. last.

Noting that supply-side intervention options are limited in the near term, not least because capacity expansion takes time, HSBC’s Neumann said further reduction in commodity prices may ultimately require a slowdown in sectors of the Chinese economy which are intensive users of raw materials.

“There are reasons to expect this to happen, in part because tighter credit conditions for developers could slow the pace of home construction,” he said, adding that China could help companies manage the risks of commodity price volatility by increasing onshore trading and offering more hedging products.

Reporting by Emily Chow in Shanghai, additional reporting by Min Zhang in Beijing; Editing by Shivani Singh, Gavin Maguire and Kirsten Donovan

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