The Chinese government is stepping up efforts to help factories, power plants and national farms cope with the current soaring commodity costs. As Chinese citizens have escaped the worst consequences, the supply chain faces significant financial challenges. Influential politicians, state officials and stock exchanges have managed to stabilize prices from the peaks in early May, but the situation cannot continue as it is for long.

In April, China’s producer price index, a strong indicator of factory prices,grew 6.8% year-on-year in its fastest increase since October 2017.

A cry for help

Currently, Chinese factories are absorbing most of the cost pressure so as not to pass higher prices on to consumers. Yet manufacturers of electrical products are already cutting rod and pipe orders, according to Henan Qixing Copper Co. When Premier Li Keqiant visited the east coast city of Ningbo, several local manufacturers confronted him with pleas for help: a producer of copper valves asked for additional support from the government, and a manufacturer of Home electronics explained that astronomical prices for raw materials had put great pressure on its factories.

As for farmers, pork producers face high costs of feeding corn, soybeans and wheat, even as their pork profits stagnate. According to Liu Chen, a corn farmer from Heilongjiang, fertilizer costs jumped 20%, while land rents and labor expectations have increased by half. “We will probably lose money by the time the harvest arrives,” he said.

Finally, power plants suffered from high coal prices: 865 yuan per ton, about 50% above average. ‘Almost all coal-fired power plants lose money … when prices [rise] above 800 yuan per ton ‘, said Yu Zhai, market analyst. Several factories in Guangdong have already changed their operating hours, while others have reduced their production operations to three days a week. As Yu warned, “some plants can try to reduce [electricity] generation’.

International repercussions Loom Large

Coupled with growing supply shortages, surges in commodity prices in China point to potential for global inflation. Currently the world’s largest exporter, several powerful countries will suffer if Chinese manufacturers begin to pass on the consequences of rising costs. While Chinese policymakers assure companies that the impacts on commodity prices will not last long, the government has pledged to tighten commodity market controls.

Overall, the gap between consumer price inflation (CPI) and producer price inflation (PPI) indicates “an uneven recovery of the economy”, according to Raymond Yeung, Australia and New Zealand Banking Group Ltd. chief economist for China. The global increase in raw materials, however, is not entirely under China’s control. Qu Hongbin, Chief Hong Kong Economist for China at HSBC, explained that “any policy of China [is unlikely to] fully contain the upward pressure on prices ”, as global liquidity, delays in the supply chain and the recovery of the US market all contribute to the current crisis.

In an attempt to control raw material costs, the Chinese government’s National Development and Reform Commission has said it will monitor the copper and aluminum markets much more closely. “We expect commodity prices to stabilize in the coming months”, says Louis Kuijs, Head of Asian Economics at Oxford Economics.

Still, many economists are predicting that China’s PPI will continue to rise until the second quarter of this year, especially as the world faces supply chain shortages. Global semiconductor shortages, mining disruptions and shipping delays will also make recovery difficult. And what happens in China will not stay in China. “If the bargaining power of Chinese producers is strong”, said Zhang Ning, UBS economist, “It is possible that the rise in the prices of the products is reflected in the world inflation”.

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