First grim sign in the global commodity boom sparkles in China

Chinese demand—a pillar of this year’s blistering commodities rally—may be teetering.
Beijing sailed to its economic recovery from the pandemic largely through an expansion in credit and a state-aided construction boom that sucked in raw materials from across the planet. China, the world’s biggest consumer, spent $150 billion on crude oil, iron ore and copper ore alone in the first four months of 2021. Resurgent demand and rising prices mean that’s $36 billion more than the same period last year, Bloomberg reported.

With global commodities rising to record highs, Chinese government officials are trying to temper prices and reduce some of the speculative froth that’s driven markets. Wary of inflating asset 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 derailing growth. At the same time, funding for infrastructure projects has shown signs of slowing, the report added.

Economic data for April suggest that both China’s economic expansion and its credit impulse — new credit as a percentage of GDP — may already have crested, putting the rally on a precipice. The most obvious impact of China’s deleveraging would fall on those metals keyed to real estate and infrastructure spending, from copper and aluminum, to steel and its main ingredient, iron ore.

“Credit is a major driver for commodity prices, and we reckon prices peak when credit peaks,” said Alison Li, co-head of base metals research at Mysteel in Shanghai told Bloomberg. “That refers to global credit, but Chinese credit accounts for a big part of it, especially when it comes to infrastructure and property investment.”

But the impact of China’s credit pullback could ripple far and wide, threatening the rally in global oil prices and even China’s crop markets. And while tighter money supply hasn’t stopped many metals hitting eye-popping levels in recent weeks, some, like copper, are already seeing consumers shying away from higher prices.

A lag between the withdrawal of credit and stimulus from the economy and its impact on China’s raw material purchases may mean that markets haven’t peaked yet. However, its companies may eventually moderate imports due to tighter credit conditions, which means the direction of the global commodity market will hinge on how much the recovery in economies including the U.S. and Europe can continue to drive prices higher, the report added.

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