China Faces Flareups in Its Bid to Tame Commodities Boom

A worker stacks a coil of steel reinforcing bar with a forklift at a metal stock yard in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

China Faces Flareups in Its Bid to Tame Commodities Boom


Commodities are in retreat, but it’s too early for Beijing to declare victory in its two-month battle to quash prices and ease rising factory costs.

China has rolled out a swathe of measures -- from trading curbs to releases from state stockpiles -- in a sweeping effort to stem inflation by cooling runaway commodities. Many of the prices have fallen from May peaks, with steel in particular beating a rapid retreat.

But it’s unclear exactly how much credit for that lies with Beijing, and outcomes are patchy: coal prices are resurgent, even if metals and crops have fallen. And, most importantly, it’s possible that the price declines might not stick and China’s efforts to control them founder like many before.

China Faces Flareups in Its Bid to Tame Commodities Boom

For Beijing, a big challenge is that this year’s commodity boom is global in scope. Though still the biggest importer, China is moving from the center of the commodities universe. Last week’s rout was arguably driven as much by the Federal Reserve’s hawkish turn and weather in the U.S. as by Beijing’s intensifying campaign.

Likewise, if commodity bulls are right and recent losses prove temporary, Beijing may find it has already used much of its firepower.

“Intervention can help alleviate the pressure but it’s hard to change the trend,” said Hao Hong, head of research and chief strategist at Bocom International. “Commodity inflation is driven by global demand growth, rather than by China. China is only a price taker.”

China Faces Flareups in Its Bid to Tame Commodities Boom

For clues on what comes next, it’s useful to look at individual markets. Here’s a run through of some of China’s major commodities markets, and where they stand two months into an anti-inflation drive:


Shanghai copper futures are at two-month lows, after a double-blow from Beijing last week. A pledge by China’s strategic stockpiler to release inventories was a serious sign of Beijing’s desire to quell prices, as was a warning for state firms to reduce exposure to overseas commodities markets. But even if planned sales to end-users boost domestic supply, investors have questioned China’s ability to have a sustained impact.

China Faces Flareups in Its Bid to Tame Commodities Boom

“We do not think the rally is over,” Citigroup Inc. analysts including Tracy Liao said in an emailed note on June 17. Beijing’s measures “target managing expectations and deterring speculators rather than solving supply/demand imbalances.” With inventories low, it’s likely that investors will buy into prices declines, reigniting the rally in coming months, the bank said.


Iron ore’s had some wild weeks as Beijing’s push to calm steel prices mixes with rampant demand, patches of supply curbs, and a recovering global industry. Chinese prices for steel rebar used in construction are down about 19% from their May peak, but are still far above long-term averages. Iron ore futures fell Monday and are down about 14% on the same basis.

China Faces Flareups in Its Bid to Tame Commodities Boom

While Chinese demand might moderate in the second half -- and that’s not a given -- unprecedented stimulus elsewhere in the world might pump up demand for steel and other building materials. And, Beijing is trying to bring down prices even as it trumpets a desire to reduce output, a policy which, if effected, works in the opposite direction. On Monday, the government again vowed to keep a close watch on spot iron ore prices.


China’s top economic planning body specifically mentioned coal on Friday as it repeated its pledge to stabilize commodities. Thermal coal futures hit five-week highs at the end of last week. Strong demand amid the peak summer season is coinciding with a spate of accidents that prompted some supply shutdowns. Mines in Hubei were ordered shut until July 5 due to concern over industrial accidents after a gas pipeline explosion killed 25 people earlier this month. China’s coal output increased only modestly in May, and inventories are low.

China Faces Flareups in Its Bid to Tame Commodities Boom

​If demand continues to overwhelm supply, Beijing will face a battle to manage prices that are already far above the threshold the government is thought to tolerate. Officials have considered moving to price caps. But those are likely to spur even more price volatility, rather than reversing the rally, according to Bloomberg Intelligence analyst Michelle Leung. Thermal coal prices are yet to hit their peak, she said.


Here’s a different challenge. Wholesale prices for pork in China have plunged more than 50% from mid-January, a decline so steep that the government appears to want it slowed. The NDRC last week urged hog producers to keep production “reasonable” after the 16-week slump triggered an alert from a newly adopted early-warning system.

China Faces Flareups in Its Bid to Tame Commodities Boom

The nation’s hog herd had recovered smartly since the ravages of African swine fever, and lower prices risks derailing the rebound. Sluggish seasonal demand, sales of obese hogs and increasing imports will likely extend the rout in pork prices. Muyuan Foods Co., the country’s biggest pig breeder, said in May it’s expecting a continued drop in domestic hog prices, with the slump not bottoming out until next year or even 2023.

©2021 Bloomberg L.P.

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