China’s factories, power plants and farms are suffering the worst effects of a spike in commodity costs that has yet to hit the wallets of the nation’s citizens.
Electronics manufacturers balk at volatile commodity prices and cut orders for rods and pipes, said Henan Qixing Copper Co. This is a double whammy for the metal parts supplier, which is already facing soaring prices for refined copper.
“It’s a big test for the company’s capital,†said Hai Jianxun, sales manager at Qixing, a medium-sized copper maker in the Chinese industrial base. This situation “requires a lot more capital to run the business.”
The Chinese government has stepped up efforts to bring commodity prices under control to help these industries weather what it hopes is a transient inflationary surge. Rhetorical intervention by leading politicians, state planners and stock exchanges has succeeded in pushing prices down from historic highs reached earlier this month. But for many players in the supply chain, financial problems mount.
During a recent Premier Li Keqiang’s visit to the east coast city of Ningbo, a home electronics maker complained that rising raw material prices had put enormous pressure on its operations. Another, a producer of copper valves, lobbied the prime minister for more government support.
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As producer price inflation (PPI) surged, consumer prices – which are what the central bank really cares about when calculating monetary policy – have remained more subdued. For this to happen, the supply chain must absorb the rising costs and not pass them on to consumers.
“Household spending remains low, so businesses in contact with consumers who are exposed to a higher PPI will find it difficult to pass on price increases,†said Shaun Roache, chief economist for APAC at S&P Global Ratings. “For now, higher PPI inflation threatens to squeeze profit margins.”
Power stretched
Factories and the power plants that power them are also particularly vulnerable to high coal prices. With China’s economic recovery pushing energy use to exceed pre-pandemic levels and drought in the south of the country causing hydropower to drop, energy costs are a growing headache.
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Pressure on electricity supply has already forced some factories in southern Guangdong industrial hub to move operations to off-peak hours, said Yu Zhai, analyst at Wood Mackenzie Ltd. Others are only allowed to operate three days a week. affect their ability to fill orders, the Jemian news site reported. Such power consumption phasing measures could last three months.
Coal from Qinhuangdao Port costs 865 yuan per ton, about 50% more than average. When prices exceed 800 yuan per ton, almost all coal-fired power plants in China lose money, Yu said. “Some factories may try to cut production to avoid more losses,†he said. .
Frustration on the farm
Farmers, large and small, are also suffering. Investors have punished the shares of the largest hog producers, which face squeeze in margins amid rising feed costs, including corn, soybeans and wheat, even as pork prices collapse.
Muyuan Foods Co., the largest in China pig farmer costs rise due to rising raw material prices. The timing couldn’t be worse, with live pig futures prices in China falling to their lowest since the derivative launched earlier this year.
And soaring grain markets are hurting even producers who should benefit from higher prices.
Liu Chen, a corn farmer in northeastern Heilongjiang Province, said land rents and labor costs jumped by about half, while fertilizer prices rose. by 20%, as part of rising domestic corn prices, which peaked at the start of the year.
“With the current prices of corn falling, it is very likely that we will lose money by the time the harvest arrives,†Liu said.
– With help from Jason Rogers, Ann Koh, Dan Murtaugh, Shuping Niu, Winnie Zhu and Lin Zhu