Market Insights: China’s Industrial Slowdown Could Kill The Commodity Rally

Slowing Down Demand for Metal

One of the biggest drivers of the surge in metals prices this year, the world’s top commodity consumer China, is showing signs of a slowdown in demand, which could drag down copper and iron ore prices for the rest of the year after a blistering rally in the first half. 

Chinese factory activity growth slowed down to the smallest in 15 months, imports of copper and iron ore are also slowing down amid surging prices and curbs in China’s steel manufacturing, while authorities are releasing metals stocks from reserves to cool rallying prices which raise manufacturing costs. 

All these factors from the past few weeks are bearish for the Chinese demand—and as a result, imports—of metals such as iron ore, copper, zinc, and aluminum, Reuters columnist Clyde Russell notes. 

Although analysts say that slower Chinese demand doesn’t necessarily mean lower commodity prices, because of tight global markets, China may not be a key driver of metals demand through the end of 2021. That’s because of slowing factory growth, authority-mandated caps on steel manufacturing, and the release of tons of metals from China’s reserves. 

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) showed this week that Chinese factory growth was at its slowest in July in 15 months, also because of high raw material prices, especially for industrial metals.

At the same time, China’s imports of iron ore, the key material for steel manufacturing, fell in June to the lowest in 13 months, slipping by 0.4 percent from May and by 12.1 percent from June 2020. 

China moved to cap steel production and steel exports this year as part of its pledge to reduce emissions. Chinese authorities have implemented a policy to keep steel output flat at 2020 levels. 

Following a 12-percent jump in steel production in the first half of the year, this policy means that Chinese steel manufacturing will likely drop in the second half of the year, dragging down demand for iron ore, too, analysts tell Global Times.

“Cutting production is the main theme for the entire steel industry for the rest of the year not only because of environmental goals but also the unsustainability for firms to produce so much steel when the cost is so high,” a steel industry insider told the Global Times this week. 

“China steel mills’ restrictions could result in around 75 million tonnes less iron ore demand in the second half,” analysts at UBS said in a July note carried by Reuters. 

The curbs on steel production in China have already resulted in lower iron ore prices. 

“Chinese policymakers are committed to curbing any excessive gains in commodity prices, which may deter some financial investors from re-entering the market, especially considering the uncertainties in the broader market as the Fed moves to taper asset purchases,” Wenyu Yao, Senior Commodities Strategist at ING, wrote in a July 20 note.

Demand across most commodities in China is expected to slow down in the second half of 2021, Wood Mackenzie said in a new monthly China Economic Focus report last week.
“China’s economy is expected to slow down in H2 2021. Slower export growth, rising commodity prices, lacklustre infrastructure investment and expiring subsidies will all drag down the country’s GDP growth. As a result, we should see a deceleration of commodities demand in China,” Wood Mackenzie senior economist Yanting Zhou said.

 

Source: Yahoo Finance

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Post time: Aug-09-2021