Commodity price movement in China might cause inflation

As steel prices continue to grow, It is highly believed that the commodities will experience the same overall price increase.

Chinese steel mills’ decision to raise prices amongst rising raw material costs has raised concerns about the risk of inflation in China. It may have an impact on smaller manufacturers who cannot afford higher prices.

China’s commodity prices are higher than pre-pandemic levels. The cost of iron ore hit a record high of US$200 per ton last week. Iron ore is the key element used to produce steel.

We can see commodities as a barometer of economic health. When the economy gradually recovers, the demand for commodities will increase.

Another benefit of commodities is their ability to hedge against inflation. When the economy is booming, prices tend to rise and convert them into commodities.

ETF investors can use funds such as SLX for specialized commodity exposure. As consumer prices rise, exposure to steel can help hedge portfolios.

Chinese iron ore prices fall about 10%

The iron ore benchmark price dropped by 9.5% in China because market partakers hesitated after a super rebound. It brought prices to historical highs in the past few days.

Iron ore, the most actively traded on the Dalian Commodity Exchange, closed down 7.5% to 1,217 yuan (US$188.66) per ton after hitting 1,190 yuan earlier in the session.

China’s strong demand continues to exceed supply. It caused the price of iron ore in New York to soar to a record US$237.57 per ton on Wednesday.

Other steelmaking components have also fallen. Dalian coking coal and coke dropped by 3.9% to 1,988 yuan and 2,729 yuan per ton, respectively.

On Wednesday, China’s State Council plans to strengthen coordination between monetary policy and other policies to maintain stable economic operations. Also, they need to somehow respond to rapid commodity prices without outlining detailed measures.

Continued supply tightening is supporting record price levels. Major iron ore producers reported that production in the March quarter fell seasonally. India’s growing concerns about the escalation of the covid-19 crisis may affect the country’s metals.

The high-speed iron ore prices in early 2021 are unsustainable. With tight supply and the lack of large-scale expansion projects, the market fundamentals in 2021 will remain strong.

Steel demand increase will keep iron ore prices at/above the high end of our price sensitivity of US$70-100 per ton.