(Bloomberg) – The commodities boom that helped propel producer inflation to a 26-year high in China is showing signs of slowing, the forces that have driven prices up over the past year are moving back.

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An energy crisis that has fueled record coal prices appears to be subsiding for the time being, as aggressive efforts to eradicate virus outbreaks deplete consumer travel and therefore demand for jet fuels. Meanwhile, the liquidity crunch surrounding China’s heavily indebted real estate developers is dashing hopes of a rebound in steel and copper.

As bulls in the commodities market outside of China point to dwindling stocks of oil or metals to argue for higher prices, investors in the world’s second-largest economy are cautious, according to Xiao Fu , head of global commodities strategy based in London in a foreign unit of Bank of China.

“There is no massive interest in chasing the prices higher, and there is a lot of pressure on buyers,” she said by phone. “For China, inflationary pressures could be a little more contained than abroad.”

Still, a lot could change by 2022. The Winter Olympics are looming and Beijing’s emissions policy continues to change. Some investors are also hoping for greater central government support for the faltering real estate sector, which in turn will support demand for metals.

Also, while most commodity prices are stabilizing, they are doing so at relatively high levels, especially compared to a year ago. And the effects of past surges still trickle down to the economy. High electricity prices, for example, risk increasing costs for manufacturers of everything from cars to clothing.

Winter

The measures taken by China to eliminate the coronavirus are becoming more and more extreme, as the country becomes the only place in the world that will not accept the pathogen as endemic. With restrictions intensifying in several places, including Beijing over the past month, travel has fallen, with IHS Markit estimating a 10% drop this quarter for jet fuels.

Demand for gasoline is weakening as consumers buy fewer cars or use them less. And in diesel, a campaign coordinated by Beijing to increase production and reduce exports avoided a supply crisis and stabilized stocks.

As temperatures drop, the monumental mining push by the central government since the September energy crisis is likely to avert another large-scale energy shortage: Coal prices remain at less than half of the October peak and stocks are low. closer to healthier levels. This has eased the pressure on all energy markets and along the coal supply chain.

China will also want clear blue skies for the Winter Olympics which begin in early February, reducing both oil supply and demand as companies comply with environmental imperatives, said Yuntao Liu, analyst at the London consultant Energy Aspects.

However, a harsh winter could strain energy supplies by increasing the demand for heating. Soaring natural gas prices from Europe to Asia have already prompted a Beijing official to warn of some supply shortages during the winter. LNG prices in the domestic market are near record highs and some Chinese buyers are looking to import again.

Reforms

In China, regulatory action inevitably has the most decisive impact. This was the case in the second half of the year for metals like steel and copper as the real estate industry slipped into a debt crisis with no government bailout in sight.

Iron ore – the raw input for steel – has fallen by nearly two-thirds after peaking during a demand boom in the first half of the year. Construction activity has contracted as home buying fades, forcing steel production to its lowest level since December 2017.

Banks, including Citigroup Inc., expect more support for the industry ahead of a crucial Communist Party convention in late 2022, but there are few expectations for a sharp policy reversal, especially because a such a move could increase inflation in China.

“The next one to three months are likely to see weakening supply and demand in most metals, both seasonal and real estate-related,” Citigroup analysts, including Tracy Liao, wrote in a statement. note. Steel and iron ore are immediately vulnerable, they said, as the slowdown in home completions and appliance purchases will hit copper and aluminum.

The strength of government measures to reduce carbon emissions could also reignite inflation by capping industrial production. This is especially true for aluminum, one of the first victims of President Xi Jinping’s initial efforts to target the biggest energy consumers.

On top of that, electricity reforms rolled out in some regions amid recent power shortages have given power producers more leeway to raise prices for their industrial consumers. Some regions have increased prices by up to 80% for industrial sectors like aluminum smelters, threatening cost pressures.

“These reforms will allow inflationary pressure to shift from coal prices to electricity prices and then across all industrial sectors,” said Yanting Zhou, Beijing-based economist at researcher Wood Mackenzie. “There will be pressure for electricity prices to be higher than before the pandemic.”

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