Analysts say the recent moves to curb soaring commodity prices are expected to have only a short-lived effect unless the Chinese authorities take the risk of lowering economic growth by introducing measures to curb consumption.
File photo: Copper plates are stored in a warehouse near Yangshan Port in Shanghai, March 2012.
China’s State Council executive meeting on Wednesday proposed to attach great importance to the adverse impact of rising commodity prices, to adopt comprehensive measures to protect supply, curb their prices unreasonably high, and strive to prevent the transmission of consumer prices to residents. The news triggered an overall decline in industrial metals on Thursday.
However, with strong economic growth in China driving a surge in demand for metals for manufacturing and construction activities, and production problems in some key metal-producing countries keeping overall metal supply in check, the curbs will have only a limited impact on prices unless top policymakers can reduce real demand.
“With commodities, Chinese officials are caught between a rock and a hard place. To get prices to stabilize or even fall will require suppressing demand,” said Frederic Neumann, head of HSBC’s Asian economic research unit.
“On its own, expanding supply by increasing production or releasing inventories will probably only have a temporary impact on dampening price increases. The trouble with limiting demand, of course, is that it will hurt economic growth.”
If supply remains inelastic, “you can’t curb demand without hurting the economy,” said Wenyu Yao, senior commodities strategist at ING (Netherlands International Group).
“There is no perfect solution.”
The threat of a possible strike at Chilean copper mines and delays in iron ore supplies from Brazil’s Vale are expected to limit base metal supplies in 2021.
‘Strategic’ action
Beijing warned of overheated commodity prices, with prices of key base metals rising by more than a third so far this year, leading to a spike in ex-factory prices and a drop in output last month.
China’s regular state meeting and proposed to strengthen the two-way regulation of supply and demand, the implementation of the increase in export tariffs on some steel products on pig iron and scrap steel, such as the implementation of zero import tentative tax rate, the abolition of some steel products export tax rebates and other policies. Second, to strengthen market supervision, strengthen industry self-regulation, strengthen the supervision of the linkage of the futures and spot markets, to investigate abnormal transactions and malicious speculation, and strictly investigate price gouging in accordance with the law, especially hoarding, etc.
China does not disclose data on strategic material reserves. It has in the past purchased commodities such as aluminum and zinc to support domestic manufacturers and has sold industrial metals such as copper to curb price spikes.
“China’s desire to release metals to curb prices suggests they have enough metal stocks to bring prices down in the short term, but it won’t have a lasting impact on the market,” said ANZ commodities analyst Soni Kumari.
China’s State Administration of Grain and Material Reserves did not respond to a reporter’s request for comment.
“(State) reserve releases have essentially increased market supply, but I don’t think it’s a long-term solution. It’s not wise to release large amounts of reserves on a regular basis, especially for a strategic metal like copper,” ING’s Wenyu Yao said.
China is expected to crack down on hoarding, but the impact is likely to be temporary as overall inventories are still relatively low.
Even so, the recent slowdown in metal purchases by some Chinese builders suggests that China has reason to be wary.
“The government has two misgivings: first, the pressure on end users and inflation from higher commodity prices, and second, if higher prices are not passed on to end users, then downstream manufacturers can’t survive and they have to shut down and bring unemployment,” said an anonymous broker in Hong Kong.
“These are two sides of the issue and they have to balance the policy.”
In addition to the Beijing authorities’ move, the Development and Reform Commission said this week it would stabilize the steel and iron ore markets, with the tide of price hikes expected to cool in the second half of this year.
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