An energy crisis that propelled record coal prices looks to calm for now, while aggressive efforts to stamp out the virus outbreak are curtailing consumer travel and so does demand for jet fuel. Meanwhile, the liquidity crisis around China’s highly indebted property developers is eroding hopes of a rebound in steel and copper.
Geo-market bulls outside China point to dwindling inventories of oil or metals, arguing for higher prices, with investors inside the world’s second-largest economy cautious, said London-based head of global commodities strategy Xiao Fu. According to. Bank of China.
“There’s no major interest to chase a price hike, and there’s a lot of pressure on buyers,” she said over the phone. “For China, inflationary pressures may be slightly higher than overseas.”
Still, a lot can change in 2022. The Winter Olympics loom, and Beijing’s emissions policy continues to change. Some investors are expecting more support from the central government for the property sector which in turn will boost the demand for metals.
Furthermore, while most commodity prices are stabilizing, they are doing so at relatively high levels, especially compared to a year ago. And the effects of the earlier boom are still running through the economy. Higher electricity prices, for example, risk increasing costs for manufacturers of everything from cars to clothing.
cold
China’s moves to eliminate the coronavirus are becoming more extreme, as the country remains the only place in the world that will not admit the pathogen as an endemic. With restrictions intensifying in several places, including Beijing, over the past month, IHS Markit forecasts a 10% drop in the quarter for jet fuel.
Demand for gasoline is weakening as consumers buy fewer cars or use them less. And in diesel, a Beijing-coordinated campaign to ramp up production and reduce exports averted a supply crisis and stabilized inventories.
As temperatures drop, the central government’s monumental mining push will probably offset another massive energy crunch since September’s power shortage: coal prices remain at less than half of October’s and reserves remain at healthy levels. are close to. This has eased pressure on all energy markets and coal supply chains.
Yuntao Liu, analyst at London-based consultancy Energy Aspects, said China also wants clear blue skies for the Winter Olympics in early February, which reduces both supply and demand for oil, as companies comply with environmental directives. does.
Nevertheless, severe winter weather could test energy supply by increasing heating demand. Rising natural gas prices from Europe to Asia have already prompted a Beijing official to warn of some shortfall in supplies during the winter. Domestic LNG prices are near record highs, and some Chinese buyers are looking to import again.
Improvement
In China, it is essentially regulatory action that has the most decisive effect. This has been the case for metals such as steel and copper in the second half of the year as the real estate sector was mired in debt and no government bailouts were in sight.
Iron ore – the crude input for steel – fell by nearly two-thirds in the first half following a surge in demand. 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 sector ahead of a crucial Communist Party Congress in late 2022, but there is some hope of a sharp reversal in policy, especially as any such move could increase inflation in China. Is.
“Supply and demand for most metals related to weather and assets could weaken over the next one to three months,” Citigroup analysts, including Tracy Liao, wrote in a note. Steel and iron ore weaken immediately, he said, slowing home completions and consumer-appliance purchases will affect copper and aluminum.
Government power could re-ignite inflation by limiting industrial production to reduce carbon emissions. This is especially true in aluminum, which is a major victim of President Xi Jinping’s early attempts to target the biggest energy-passers.
On top of that, recent power reforms in some areas amid power shortages have given power generators more leeway to raise prices for their industrial consumers. Some sectors have increased prices by up to 80% for industrial sectors such as aluminum smelters, threatening cost pressures.
“These reforms will allow inflationary pressures to flow from coal prices to electricity prices and then through all industrial sectors,” said Yating Zhou, a Beijing-based economist at researcher Wood Mackenzie. Electricity prices are expected to be higher than in the past. There will be pressure.” -Global pandemic.”
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