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China Commodity Market: Price surge and its impact on manufacturing

The year 2021 faced a dramatic surge in commodity prices across the world. This has tremendously affected China’s commodity market. Major commodities have traded at a higher price for the past weeks, from agricultural products such as coffee and corn to building materials such as steel and lumber.

The price rally is attributed to the global economic recovery and the accelerated re-opening of several economies following their vaccine rollout. Other factors include transportation issues caused by the pandemic and increased investment demand due to speculation.

In its recent World Economic Outlook, the International Monetary Fund (IMF) predicts that the global economic growth for 2021 will reach 6% before moderating to 4.4% in 2022. This was an upgrade from its October 2020 WEO forecast, reflecting the increased fiscal support in large economies and the expected recovery following vaccination efforts.

The impact of surging commodity prices on industries

Grain prices, such as those of corn, wheat, and soybeans, have been increasing this year. This is due to the growing demand from animal feed producers. Another reason is concerns regarding poor weather conditions in key growing countries, such as the persistent drought in Brazil. Grain futures have been trading at eight-year highs while Arabica coffee recorded a four-year above $1.5 per pound.

As a result, food prices went up. The Food and Agriculture Organization of the United Nations’ (FAO) Food Price Index in April averaged 120.9 points. This was 1.7% higher than March and 30.8% higher year-on-year. Grain price increases ultimately affect livestock farmers. This is due to the rising costs of corn and soybean meals fed to animals.

Meanwhile, copper has been on a rally for over a year. This is as numerous countries pledging to use more renewable energy sources and to promote the use of electric vehicles. Copper plays an important role in e-motors. On the London Metal Exchange, the metal reached a record-high $10,300 per ton. Meanwhile, it was priced at $4.72 per pound in New York Mercantile Exchange.

The price of silver reached the upper end at $27.75, while gold has breached the $1,800 per troy ounce mark. On the other hand, crude oil has regained momentum but not at the level of other commodities. Brent crude is on the rise but has yet to breach the $70 per barrel level.

Steel prices have also surged recently despite global overcapacity in the past decade. China steel futures have even overtaken iron ore price gains. This resulted due to the measures implemented by the Chinese government to control output. The overall price increases in commodities affect retailers’ costs, and they would have to absorb some of it initially. However, these costs were eventually passed on to consumers, driving inflation upward.

China commodity market and manufacturers

China is both a leading importer and exporter of raw materials globally. With its economy recovering from the Covid-19 pandemic, Chinese industries face both an acceleration in production activities and increased costs from higher raw material prices.
Data from China’s National Bureau of Statistics (NBS) showed 92.3% increase in profits for industrial firms, reaching $109.66 bn in March. Profit posted by raw materials extraction and processing industries was the main driver in this surge. This is especially seen in chemicals, metals, and petroleum.

Manufacturers in China have seen a significant increase in export orders. But they also face commodity prices that are higher than pre-pandemic levels. Additionally, small private-sector manufacturers in China were forced to pass on some of these costs to consumers to remain profitable.

For instance, leading home appliance manufacturers have expressed plans to increase their prices further. This is because raw materials make up over 60% of their total production costs. China’s producer price index rose increased by 6.8% year-on-year in April. This was the highest surge since October 2017 after going up by 4.4% in March, according to NBS data. Meanwhile, consumer prices went up by 0.9% this year, slightly lower than the 1% projection.

Chinese government to dampen effects of price surge

Last April, Ministry of Industry and Information Technology spokesman Huang Libin said that the impact of commodity price increases on China’s manufacturing sector would be manageable overall.

The Chinese government plans to implement initiatives. This would stabilise prices, avoid panic-buying or hoarding, and reinforce market supervision to crack down on market monopoly and malicious speculation. China’s Financial Stability and Development Commission has already issued a warning on the price surge of commodities in April.

China is looking to strengthen market regulation of raw materials to avoid contributing to global inflation. Inflation could occur if the price surge in commodities causes Chinese manufacturers to also increase their prices.