Soaring commodity prices could affect China's economic recovery

SHANGHAI, May 25 (SMM) – According to the April 2021 edition of the IMF's Word Economic Outlook, the global economy is forecasted to expand at 6% in 2021, up from the 5.5% growth rate projected in January, due to the faster-than-expected recovery of advanced economies. China's GDP is projected to increase by 8.4% y/y in 2021. Strong demand in ferrous and nonferrous metals have also indicated the global economic recovery, which has driven major commodities' prices soaring.

Ferrous and Nonferrous industries boosting PPI

China's National Bureau of Statistics (NBS) released Producer Price Index (PPI) and Consumer Price Index (CPI)  for April 2021. In April 2021, PPI for manufactured goods rose by 6.8% year-on-year and 0.9% month-on-month. During the same time period, the national CPI rose by 0.9% year-on-year and fell by 0.3% month-on-month. Over the first four months, China's PPI and CPI increased by 3.3% and 0.2% compared with the same period last year, respectively.

According to NBS, over the first four months, producer prices for Mining of Ferrous Metal Ores, Manufacture and Processing of Ferrous Metals, Manufacture and Processing of Non-Ferrous Metals and Mining of Non-Ferrous Metal Ores increased by 31.2%, 18.7% and 17.1% and 12.1% year-on-year, respectively, which are much higher than other major industries. It indicates the current inflation is mainly driven by the rapid increase in commodity prices. High inflation would raise uncertainty in China’s market.

Strong demand and weak US dollar push commodity prices up

The strong demand in China and the rapid recovery of European and the US economies are the main reasons for bulls to enter the market. Strong demand recovery in commodities has incurred more concerns on supply side. The US Fed has constantly emphasised the weakness of the US dollar, and it will not reduce the scale of bond purchases or withdraw from any quantitative easing policy until the economy recovers and substantial progress is made on its goal.

SMM, as a leading consultancy company in China, has built wild coverage of the domestic commodity spot prices discovery. According to SMM Database, as shown in the above chart, commodity spot prices in China have started to recover since the end of March 2020. Copper is leading a rebound among the metals, followed by Rebar, Aluminium, Tin and Nickel. Although Lead and Zinc prices had the same trend before September 2020, they are presenting a divergent development now, which is driven by their own market balance. The weakening US dollar also supports the price rebound across commodities.

In April, China's exports in dollar terms surged 32.3% y/y. The strong recovery in the developed economies and new orders that shift to China contributed to the strong export growth, which supported manufacturers in China. Exports will be a key driver for China’s growth this year. The bigger-than-expected domestic infrastructure investment also boosted the commodity demand.

The battery metals and compounds, including cobalt, lithium, lithium carbonate, lithium hydroxide and cobalt sulphate, have come out of the bottom since the beginning of this year, which benefit from the strong New Energy Vehicles (NEVs) output in China. According to China Association of Automobile Manufacturers (CAAM), China's total auto output increased by 53.4% y/y over the first four months this year, of which NEVs output shot up by 257.5%, compared to the same period last year. The booming auto industry has supported the demand of aluminium, copper and battery metals.

The Chinese government concerns over soaring commodity prices

However, soaring commodity prices have started to put more pressure on Chinese manufacturers. According to the latest SMM's survey, the higher raw materials costs have started to affect the utilisation rates of some final goods manufacturers in China. The rapid increase in commodity prices has not been passed on to their customs or end users, which has pushed them in the red. Some of them have to shut down their production lines to reduce loss. SMM expects the utilisation rates of commodities downstream fabrication companies could slightly decrease soon.

The Chinese government has also expressed the concern that a fast increase in commodity prices could undermine the China's economic recovery. Recently the Chinese authorities have shown strong signals that they could intervene the rapid increase in commodity prices. Chinese Premier Li Keqiang stated at the State Council executive meeting on 19 May that “We attach great importance to the adverse effects of rising commodity prices”. He also emphasized that comprehensive policies will be implemented to ensure supply, curb unreasonable price increases, and strive to prevent transmission to consumer prices, maintain monetary policy stability and stable economic operation, and reasonably guide market expectations. On 23 May, the Chinese authorities said it would show a “zero tolerance” approach to illegal activities, continue to increase law enforcement inspections, and investigate abnormal transactions and malicious speculation. The intervention has started to correct commodity prices in Chinese market. However, any supply side disruption could push commodity prices up again.