The commodities boom that helped propel producer inflation to a 26-year high in China is showing signs of waning, with the forces that pushed prices up over the past year now in retreat.
An energy crisis that fueled record coal prices looks becalmed for now, while aggressive efforts to stamp out virus outbreaks are wearing down consumer travel and therefore demand for jet fuels. Meanwhile, the liquidity crisis surrounding China’s highly indebted property developers is vanquishing hopes for a rebound in steel and copper.
While commodity-market bulls outside China point to dwindling inventories for oil or metals to argue for higher prices, investors inside the world’s second-biggest economy are cautious, according to Xiao Fu, London-based head of global commodities strategy at an overseas unit of Bank of China.
“There isn’t massive interest to chase prices higher, and there is quite a lot of pressure on buyers,” she said by phone. “For China, the inflationary pressures may be a bit more contained than overseas.”
Still, a lot could change heading into 2022. The Winter Olympics loom, and Beijing’s emissions policy continues to shift. Some investors are also holding out hope for more support from the central government for the reeling property sector that will in turn prop up metals demand.
Also, while most commodity prices are stabilizing, they are doing so at relatively high levels, especially versus a year ago. And the effects of earlier surges are still rippling through the economy. High electricity prices, for example, risk raising costs for manufacturers of everything from cars to clothes.
Winter
China’s moves to eliminate the coronavirus are getting more extreme, as the country becomes the only place left in the world that won’t accept the pathogen as endemic. With restrictions intensifying in several places including Beijing over the past month, travel has dropped with IHS Markit estimating a 10% fall this quarter for jet fuels.
Gasoline demand is weakening as consumers buy fewer cars or use them less. And in diesel, a Beijing-coordinated campaign to ramp up production and slash exports averted a supply crisis and stabilized inventories.
