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China’s first global commodity boom warning sign flashes

(Bloomberg) – One of the mainstays of this year’s meteoric commodity rally – Chinese demand – could be faltering. Beijing has successfully recovered from the pandemic economy in large part thanks to a credit expansion and a market boom. construction aided by the state that sucked raw materials from across the planet. Already the world’s largest consumer, China has spent $ 150 billion on crude oil, iron ore and copper ore alone in the first four months of 2021. Resurgent demand and rising prices mean that is $ 36 billion more than the same period last year. From record levels, Chinese government officials are trying to temper prices and reduce some of the speculative scum that has fueled markets. Keen to inflate asset bubbles, the People’s Bank of China has also restricted the flow of money to the economy since last year, albeit gradually to avoid derailing growth. At the same time, financing for infrastructure projects has shown signs of slowing. Economic data for April suggests that China’s economic expansion and its credit boost – new credit as a percentage of GDP – may have be already increased, placing the rally in a precarious situation. The most obvious impact of China’s deleveraging would reverberate through metals critical to real estate and infrastructure spending, from copper and aluminum to steel and its main ingredient, iron ore. when credit peaks, ”said Alison Li, co-director of base metals research at Mysteel in Shanghai. “It refers to global credit, but Chinese credit is a big part of it, especially when it comes to infrastructure and real estate investments.” But the impact of the decline in credit in China could have wide repercussions, threatening the rise in world oil prices and even Chinese agricultural markets. And while the tightening money supply hasn’t stopped many metals from reaching stunning levels in recent weeks, some, like copper, are already seeing consumers shy away from rising prices. “The slowdown in credit will have a negative impact on Chinese demand for raw materials. Said Hao Zhou, Senior Emerging Markets Economist at Commerzbank AG. “So far, real estate and infrastructure investments have not shown an obvious deceleration. But they should have a downward trend in the second half of this year. A lag between pulling credit and reviving the economy and its impact on China’s commodity purchases may mean markets have yet to peak. However, its companies could potentially soften their imports due to tighter credit conditions, meaning that the direction of the global commodity market will depend on the extent to which the recovery in economies, notably the United States and the United States. in Europe, may continue to drive up prices. an expansion of capacity, such as Beijing’s decision to develop the country’s crude oil refining and copper smelting industries. Purchases of materials needed for production in these sectors could continue to register gains, albeit at a slower pace. One example of a slowdown in purchases is probably refined copper, said Mysteel’s Mr. Li. The premium paid for the metal at the port of Yangshan has already hit its lowest level in four years as a sign of falling demand, and imports are expected to fall this year, she said. has a few months to go, according to a recent note from Citigroup Inc., citing the lag between peak credit and peak demand. From around $ 9,850 a tonne now, the bank expects copper to hit $ 12,200 by September, and that’s a dynamic playing out in ferrous metals markets as well. Gutierrez, analyst at Kallanish Commodities Ltd. “The demand for iron ore is responding with a delay of several months before the tightening. Demand for steel is still at record levels thanks to the economic recovery and ongoing investments, but is expected to decline slightly by the end of the year. For agriculture, the credit crunch may only affect the surge in Chinese crop imports around the margins, said Ma Wenfeng, analyst at Beijing Orient Agribusiness Consultant Co. Less liquidity in the system could lower prices. by curbing speculation, which in turn could reduce the low proportion of imports handled by private companies, he said. giants held by the United States to continue importing grain to cover the country’s domestic deficit, to replenish state reserves and to meet the obligations of trade agreements with the United States. On the one hand, the authorities are unlikely to accelerate deleveraging from this point, according to the latest comments from the State Council, the Chinese cabinet. “The internal guidelines of our macro department are that the country will not tighten credit too much – they just won.” t relax any further, ”said Harry Jiang, head of trade and research at Yonggang Resouces, a commodities trader in Shanghai. “We don’t have a lot of worries about the credit crunch.” And in any case, the commodity markets are no longer almost entirely in the grip of Chinese demand. “In the past, the inflection point for industrial metal prices often coincides with that of China. credit cycle, ”said Larry Hu, chief China economist at Macquarie Group Ltd.“ But that doesn’t mean it’s going to be like that this time around, too, because the United States has triggered a lot more stimulus. larger than China, and their demand is very high. “Hu also stressed the caution of Chinese leaders, who probably do not want to risk stifling their much-admired recovery by sharp policy swings.” I expect Chinese real estate investment to slow down, but not too much, “he said.” Infrastructure investment has not changed too much in recent years, and neither will it. more this year. ” In addition, China has increased consumer spending as a lever for growth and is not as dependent on infrastructure and real estate investments as before, said Bruce Pang, head of macroeconomic and strategic research at China Renaissance Securities Hong Kong. The disruption of the global supply of commodities due to the pandemic is also a new factor that may support prices, he said. Or through overseas purchases, are other factors of complication when it comes to assessing import demand and prices for specific products, analysts say (update copper price in 11th paragraph) with the most reliable source of economic news. © 2021 Bloomberg LP