Soaring metal prices pose challenges for China’s recovery
The cost of everything needed for China’s post-pandemic infrastructure boom, from steel and coal to glass and cement, is soaring. The price of rebar, a type of steel used to reinforce concrete, recently hit 6,200 yuan ($ 965) per metric ton in Shanghai, up 40% this year, and a new record high. Iron ore, which is used to make steel, exceeded 1,240 yuan per metric ton ($ 194) on the Dalian Futures Exchange, an increase of 25% since the beginning of the year.
Thermal coal, glass and aluminum are reaching unprecedented heights in China. The price of plasterboard is also increasing. The steel situation has become so dire that Chinese leaders are warning of damage to the economy. And a popular idiom for the helpless – “without a thumb of steel in his hand” – is now used much more literally on social media to describe desperate shoppers.
China was the only major economy to avoid a recession last year when the pandemic hit, but it launched a $ 500 billion infrastructure-focused plan to support its recovery from the slowest growth rate in decades.
But China also has reason to worry about soaring costs. China’s Producer Price Index, which measures the evolution of the costs that manufacturers pay for materials, rose 6.8% in April from a year earlier. While this is somewhat distorted, given the impact of ending the Covid-19 pandemic in 2020, it is still the fastest rise since October 2017. This is also a big jump from the 4.4% increase in March.
“Global commodity prices are rising because stimulus measures in major economies are pushing up demand,” said Zhou Hao, senior emerging markets economist for Commerzbank, who added that “the United States and China are both engines “.
Expensive construction projects are already causing some Chinese companies to suspend work, recent survey data shows. And analysts warn that as small businesses consider cutting costs or cutting costs, they could start laying off workers.
“Small businesses face even tighter cash flow because they have less bargaining power when prices rise in their upstream industry,” wrote Luo Zhiheng, chief macro analyst at Guangzhou-based Yuekai Securities. . “They either have to accept higher production costs or cut back on production and stay away.”
Recovery efforts encountered a problem
The surge in steel and iron ore prices is due to a combination of factors. Along with construction, electric vehicle production is also fueling the rise, according to analysts at Fitch Ratings. Cars need high-strength steel that can reduce weight and improve performance, and production of electric, hybrid and fuel cell cars has skyrocketed.
China’s efforts to reduce carbon emissions have also resulted in a tightening of steel supply, analysts wrote in a report this week. China produced more than half of the world’s steel production last year, and Beijing has pressured the industry to cut production in pursuit of its goal of becoming carbon neutral by the time. 2060.
A deadly trade battle between China and Australia could also inflate prices. Beijing has erected entry barriers for several Australian exports over the past year, including coal. While one of Canberra’s most important exports, iron ore, has been spared, Beijing has looked for ways to reduce its dependence on the country.
According to Wang Jiechao, chief construction industry analyst at Pacific Securities, there are already signs that price hikes are hitting Chinese construction sites and factories. He wrote in a report released on Monday that many construction companies, foundries and small home appliance manufacturers have stopped taking orders due to production losses.
“The rapid rise in commodity prices has seriously eroded the profitability of downstream manufacturing companies,” Wang added.
Meanwhile, 44% of respondents in this survey said that although they are still progressing with construction as planned, they have had to reduce their steel purchases, which could lead them to consider suspending work in the future.
It’s also bad news for jobs, according to Luo of Yuekai Securities, who noted that small businesses are grappling with price hikes and also account for 80% of the country’s urban jobs.
Luo pointed out that the unemployment rate for young people aged 16 to 24 in April remained high at nearly 14% and that their working hours had decreased, “perhaps because small businesses were operating below their capacity under the pressure. pressure from rising costs. “
Concern in Beijing
Beijing leaders are starting to worry about rising costs and how they might weigh on the economic recovery.
Chinese Premier Li Keqiang has repeatedly referred to “rising commodity prices” and pressure on small businesses during recent state meetings, according to the central government official website.
The stakes are high. China must grow by just under 5% each year over the next decade to meet President Xi Jinping’s goal of doubling its GDP by 2035. The government has targeted growth of 6% or more this year. year, and also wants to create 11 million new jobs.
But anything that threatens its fragile economic recovery could pose risks to those ambitions – which authorities have noted.
Li, for example, said last month in a meeting with business executives that securing jobs is the “key foundation for stabilizing the economy,” adding that the government would try to help reduce the cost of raw materials.
Local governments, meanwhile, have opted for tough measures to keep prices low. At the end of last week, regulators in Shanghai and the steel pole Tangshan summoned the big steel companies and ordered them to fix their prices “at reasonable levels.” Factories could face “severe punishment” if they collude to push up steel prices, the government says.
Yet metal prices remain high. And some analysts have pointed out that it will be difficult for China to rule over commodity prices without compromising elsewhere.
Beijing “could easily run out of options” to contain inflation unless it reverses other targets, such as its climate targets, Citi analysts wrote in a research report released Monday. They added that they do not expect Beijing to abandon its environmental agenda, which has “higher political priority” than the risks of inflation.
According to Louis Kuijs of Oxford Economics, the rise in prices has revealed how much China depends on its infrastructure plan to stabilize the economy – and how difficult it can be to change course.
“The Chinese economy has performed well in the early stages of the recovery from Covid-19, benefiting from an infrastructure-driven recovery and strong real estate and export activity,” said Kuijs, head of the Asian society economy.
“The big question in China is whether this year’s growth can shift from infrastructure and real estate to corporate investment and consumption.”