With most global commodities at record highs, particularly metals, Beijing has decided to try to curb prices. Chinese demand in the wake of the health crises is behind the price rally so far this year. The Chinese government has issued a serious warning to the market. There will be "zero tolerance" for speculation. Iron fell by up to 7% during the session, although the declines have since slowed.
China emerged from the coronavirus crisis by stepping on the accelerator ofcredit expansion and stimulating infrastructure growthwith state aid. The result was that the Asian giant absorbed the entire global supply of raw materials, causing the prices of many commodities to skyrocket.
The country has become the largest consumer of raw materials. So far this year,the country has purchased $150 billion worth of oil, iron, and copper in the first four months of 2021 alone. This is almost 30% of the amount it spent last year.
It is becoming less and less beneficial for China for commodity prices to remain sky-high. 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 factor for commodity prices, and we believe that prices peak when credit peaks," Alison Li, co-head of base metals research at Mysteel, told Bloomberg. Chinese credit accounts for a large share of global credit, especially when it comes to infrastructure and property investment.
The power of metals: highs for copper, iron, and steel
The price of iron fell by up to 7% at the start of trading. The losses spread to other metals. Steel fell by around 5%. Aluminum futures also fell by 3%."With the risk of government intervention, prices will surely be affected" by market confidence, said Li Ye, an analyst at Shenyin Wanguo Futures.
The rapid rise in raw material prices has severely affected manufacturers and industrial activity, "leading to losses and defaults in the sector," says the expert.
But other experts believe that China will find it difficult to control the market. "Beijing will face the risk of exhausting its policy options," say experts at Citi. Commodity prices do not depend solely on China reducing or increasing external demand. Problems in global supply chains are also putting pressure on the market, as the European economy prepares to reopen. In addition, Beijing has approved commitments to reduce greenhouse gas emissions, which are contributing to higher prices.
