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First Warning Sign in the Global Commodity Boom Flashes in China

(Bloomberg) – A pillar of this year’s sizzling commodities rally – Chinese demand – could be shaky. Beijing owes its economic recovery from the pandemic in large part to an expansion in credit and a state-backed construction boom that sucked up resources all over the planet. China, which is already the world’s largest consumer, spent $ 150 billion on crude oil, iron ore and copper ore in the first four months of 2021 alone. Rising demand and rising prices mean that is $ 36 billion more than the same period last year. record highs, Chinese government officials seek to dampen prices and cut some of the speculative foam driving the markets. Wary of blowing bubbles, the People’s Bank of China has also been restricting the flow of money to the economy since last year, albeit gradually to avoid slippage of growth. At the same time, funding for infrastructure projects is showing signs of slowing down. Economic data for April suggests that both China’s economic expansion and its credit boost – new credit as a percentage of GDP – may have already risen, pushing the rally to a high level. precarious basis. The most obvious impact of China’s deleveraging would fall on those metals linked to real estate and infrastructure spending, from copper and aluminum to steel and its main ingredient, iron ore. when credit spikes soar, ”said Alison Li, co-head of base metals research at Mysteel in Shanghai. “That refers to global lending, but Chinese lending is a big part of it, especially when it comes to infrastructure and real estate investment.” But the impact of the credit slump in China could ripple far and wide and threaten the rise in global oil prices. even the Chinese harvest markets. And while the tighter money supply in recent weeks hasn’t stopped many metals from reaching dazzling levels, some, like copper, are already seeing consumers shy away from higher prices. “The slowdown in lending will negatively impact China’s demand for commodities,” said Hao Zhou, senior emerging markets economist at Commerzbank AG. going lower in the second half of this year. ”A slowdown between the credit pullout and stimulus from the economy and their impact on Chinese commodity purchases may mean markets have not peaked yet, but companies may eventually soften imports as a result of tighter credit conditions, meaning that the direction of the global commodities market will depend on the extent to which the recovery in economies, including the US and Europe, can continue to push up prices. grow the country’s refining and copper smelting industries n of the materials needed for production in those sectors may continue to rise, although at a slower pace. An example of slower purchases is likely in refined copper, Mysteel’s Li said. The premium paid for the metal at the port of Yangshan has been rocketing in four years, as a sign of slowing demand, and imports are likely to decline this year, she said. according to a recent note from Citigroup Inc. has a few more months to go, in which he mentions the difference between peak credit and peak demand. At about $ 10,000 per ton now, the bank expects copper to reach $ 12,200 by September. It is a dynamic that also plays out in the ferrous metals markets. “We are still in the early stages of tightening in terms of getting money on projects,” said Tomas Gutierrez, analyst at Kallanish Commodities Ltd. “Demand for iron ore is responding to tightening with a delay of several months. Steel demand is still around record highs thanks to the economic recovery and continued investment, but is likely to decline slightly towards the end of the year. “For agriculture, the credit tightening may only affect the booming Chinese imports of crops around the margins. Ma Wenfeng, an analyst with Beijing Orient Agribusiness Consultant Co. own giants to continue to import grains to cover the country’s domestic deficit, to replenish state reserves and to comply with trade agreements with the US Not a disaster More generally, Beijing’s tightening policy does not mean a disaster for commodity bulls . First, the authorities are unlikely to accelerate deleveraging from this point on, according to the latest comments from the State Council, the Chinese cabinet. “Internal guidance from our macro department is that the country will not tighten lending too much – they just won.” don’t let go, ”said Harry Jiang, head of trade and research at Yonggang Resouces, a commodities trader in Shanghai. “We are not much concerned about credit tightening.” And in any case, the commodity markets are no longer almost completely under the spell of Chinese demand. “In the past, the tipping point in industrial metal prices has often coincided with that of the Chinese market’s credit cycle,” said Larry Hu, China chief economist at Macquarie Group Ltd. “But that doesn’t mean it will be this time around, because the US has unleashed a much greater stimulus than China, and demand is very strong. “Hu also pointed to caution among Chinese leaders, who are unlikely to risk suffocating their much-admired recovery with sharp swings in policy.” I expect China’s real estate investment to slow down, but not too much, ”he said. . “Investments in infrastructure have not changed much in recent years, and not this year.” In addition, China is pumping up consumer spending as a lever for growth, rather than relying as much on infrastructure and real estate investment. as it used to be, said Bruce Pang, chief of macro and strategy research at China Renaissance Securities Hong Kong. The disruption to global commodity supply due to the pandemic is also a new factor that could support prices, he said. or via purchases from abroad, analysts say are other complicating factors when it comes to assessing import demand and prices for specific commodities. More stories like this are available at bloomberg.com Sign up now to stay ahead of the curve with the most trusted business news source. 2021 Bloomberg LP

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