China’s industrial slowdown killing the commodity rally

One of the biggest drivers of the surge in metals prices this year, the world’s top commodity consumer China, is showing signs of a slowdown in demand, which could drag down copper and iron ore prices for the rest of the year after a blistering rally in the first half. 

Chinese factory activity growth slowed down to the smallest in 15 months, imports of copper and iron ore are also slowing down amid surging prices and curbs in China’s steel manufacturing, while authorities are releasing metals stocks from reserves to cool rallying prices which raise manufacturing costs. 

All these factors from the past few weeks are bearish for the Chinese demand, and as a result, imports of metals such as iron ore, copper, zinc, and aluminum have declined.

At the same time, China’s imports of iron ore, the key material for steel manufacturing, fell in June to the lowest in 13 months, slipping by 0.4 percent from May and by 12.1 percent from June 2020. 

China moved to cap steel production and steel exports this year as part of its pledge to reduce emissions. Chinese authorities have implemented a policy to keep steel output flat at 2020 levels. 

Following a 12 per cent jump in steel production in the first half of the year, this policy means that Chinese steel manufacturing will likely drop in the second half of the year, dragging down demand for iron ore. 

China steel mills’ restrictions could result in around 75 million tonnes less iron ore demand in the second half,” analysts at UBS said in a July note. The curbs on steel production in China have already resulted in lower iron ore prices. 

China’s copper imports have also slowed down in recent months, customs data shows. But copper scrap imports have been surging, doubling in the first half of 2021, according to metals intelligence firm Roskill.  Demand across most commodities in China is expected to slow down in the second half of 2021, Wood Mackenzie said in a new monthly China Economic Focus report last week. 

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