Thursday, May 13, 2021

What Might Temper Rising Prices? "China's cabinet says it will cope effectively with fast rise in commodity prices"

 That's not as easy as it sounds, see second story.

Via Channel News Asia, May 12:

China will monitor changes in overseas and domestic markets, and effectively cope with fast increase in commodity prices and its related impact, the state council said on Wednesday.

BEIJING: China will monitor changes in overseas and domestic markets and effectively cope with a fast increase in commodity prices, the state council said on Wednesday.

China will step up coordination between monetary policy and other policies to maintain stable economic operations, the cabinet also said, as reported by state television.

Prices for commodities such as copper, coal and steelmaking raw material iron ore extended recent rallies to hit all-time highs this week on concerns a post-coronavirus pandemic demand rebound in China is outpacing supply.

China is the world's biggest market for copper, coal and iron ore and consumers face much higher costs as some analysts expect a commodities "super-cycle".

The cabinet did not say how it would cope with the rise in commodity prices.

China will support the issuance of 300 billion yuan (US$46.6 billion) special bonds for smaller firms, the cabinet said....


And from Bloomberg the day before:

It Might Be Harder Than China Thinks to Control Commodity Surge

A scorching rally in industrial commodities has spurred China to try and temper prices, though the impact may prove fleeting as the global boom in demand for raw materials is set to drive markets to new highs.

Iron ore futures kicked the week off with a surge by the daily limit to a record, though prices eased Tuesday after the Dalian Commodity Exchange raised trading limits and margin requirements and pledged to strengthen market supervision. Steel in Shanghai and coal in Zhengzhou rose after the bourses said they will increase trading fees.

Core to the commodities boom -- and debate about whether it’s a new supercycle -- is its global scope, as prices climb almost everywhere on a broad economic recovery and vast stimulus programs. With consumption being driven by a swath of markets beyond its borders, it also means Chinese authorities are likely to be tested in how effectively they can rein in surging costs that sparked the fastest rise in producer prices since October 2017.

Iron ore in Dalian dropped 1.5% to 1,306.5 yuan a ton on Tuesday, while benchmark futures in Singapore fell 0.8% to $220.60 a ton. Chinese hot-rolled coil climbed 3.2%, rebar added 1.2% and thermal coal rose 0.9%.

“Dalian’s announcement is probably effective in the very short term to curb the swings in prices and immediate inflation worries, as the market tries to keep its discipline amid a runaway market,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “Until we get a proper balancing of global iron ore demand-supply mechanics, it looks like the path of least resistance for the ferrous market is still upward.”

China has spent massively to generate a recovery that has led the world. At the same time, it has imposed supply constraints on metals like steel and aluminum to curb emissions as part of President Xi Jinping’s commitment to deliver a carbon neutral economy by 2060. And it has cut supplies of coal and other commodities like copper from major supplier Australia as relations between the two nations have deteriorated.

Iron ore has been one of the standout beneficiaries of China’s moves reduce pollution. Concerns that the country may expand steel production curbs is fueling a boom in output, increasing demand for iron ore, while robust alloy prices has enabled mills to better accommodate higher input costs.

The government now faces a policy dilemma because it is the author of many of the concerns around inflation, with commodities price gains driven to a large degree by Beijing’s economic growth, carbon and import policies.

Curbing Speculation

If restrictions by exchanges fail to have a lasting effect, other tools to control prices are available to Beijing. Those include the bluntest of instruments that would have far reaching consequences on other markets, like withdrawing liquidity from the financial system or rolling back fiscal stimulus. More precise measures for individual commodities, such as inducing additional supply or releasing strategic stockpiles, are also likely to be weighed by policy makers.

For iron ore in particular, the escalating row with Australia is driving sentiment after China announced last week that it was suspending a forum for economic dialog, putting relations with Canberra further into deep-freeze.....