Commodity Prices Surge, and China Plans to Catch Up

The soaring commodity prices threaten China’s economic growth and the purchasing power of its citizens.

Everything, from copper and steel used in construction to coal used to heat houses, is soaring. It is a massive challenge for Beijing to control this record-breaking increase.

As the global economy rebounds from the pandemic, the world’s largest commodity consumer is forced to compete for raw materials.

On Wednesday, the State Council said that China would monitor changes in overseas and domestic markets. They also mentioned that China would effectively respond to the rapid rise in commodity prices.

China will strengthen coordination between monetary policy and other policies to maintain stable economic operations.

China can rely on its sizeable state-owned sector to alleviate shortages, and recent efforts have achieved mixed results.

In terms of natural gas, the frigid winter weather has caused importers to lay off workers after not meeting demand. It seems to have prompted some importers to purchase earlier this year.

Diplomatic relations with Canberra disturbed efforts to increase the energy supply. China bans the import of Australian coal, a series of restrictions on commodities ranging from barley to wine. Several smaller natural gas importers in China received info to avoid purchasing additional natural gas from Australia next year.

What steps can China take specifically?

China has considered selling about 500,000 tons of aluminum from its national reserves to cool the market. The price plummeted as initially planned and then rose again to its highest level in a decade. Last year, China’s light metal output was 37 million tons, accounting for more than half of the world’s total output.

The country has reserves of materials such as copper, foods such as soybeans, and many crude oil reserves. However, the amount is not available to the public. Any indication that the Reserve Board is a buyer and seller could significantly change the market. Long-term plans may include adding more base metals to the strategic reserve to ensure domestic supply and alleviate potential gaps. However, any national purchase plan may now provide the impetus for the current rise.

China is also building its agricultural buffer zone. The government has purchased large quantities of U.S. corn for national reserves. It may release them before the domestic harvest in the 4Q to stabilize any price increases. Authorities fear that feed mills buying more corn to replace expensive corn may push up the new wheat crop prices. Thus,  they will impose restrictions on the sales of state wheat, which will be harvested in June.