
With much of the world's commodities at record levels, mainly metals, Beijing has decided to try to halt prices. Chinese demand in the wake of the health crises is behind the spike in prices so far this year. The Chinese government has issued a serious warning to the market. There will be "zero tolerance" against speculation. Iron ore is down as much as 7% in the session, although further declines have slowed.
China emerged from the coronavirus crisis by stepping on the accelerator of credit expansion and stimulating infrastructure growth with state aid. As a result, the Asian giant absorbed the world's entire supply of raw materials and drove up the prices of many commodities.
The country has become the largest consumer of raw materials. So far this year, the country has acquired $150 billion in oil, iron and copper in the first four months of 2021 alone. Practically, almost 30% compared to the amount it used last year.
It is becoming less and less in China's interest for commodity prices to continue to soar Economic data for April suggests that both China's economic expansion and its credit momentum (new credit as a percentage of GDP) may have already peaked. "Credit is an important driver of commodity prices, and we think prices peak when credit peaks," Alison Li, co-head of base metals research at Mysteel, tells Bloomberg. Chinese credit represents a large part of global credit, especially when it comes to infrastructure and property investment.
The power of metals: maximums for copper, iron and steel
The price of iron ore fell as much as 7% at the beginning of the session. Losses have spread to other metals. Steel is down around 5%. Aluminum futures are also down 3%. "With the risk of government intervention, prices are likely to be affected" by market sentiment," notes Li Ye, an analyst at Shenyin Wanguo Futures.
The rapid increase in raw material prices has severely affected manufacturers and industrial sector activity, "which has led to losses and defaults in the sector," says the expert.
But other experts believe China has a hard time controlling the market. "Beijing will face the risk of exhausting its policy options," say Citi experts. Commodity prices are not only dependent on whether China reduces or increases foreign demand. Problems in global supply chains are also straining the market as the European economy prepares to reopen. In addition, Beijing has approved commitments to reduce greenhouse gas emissions, which contribute to higher prices.