Caixin
Aug 20, 2018 09:01 PM
OPINION

Caixin View: Commodity Prices Could Be in for a Winter Warmup

Commodities have been sliding sharply across the board over the last few weeks, under pressure from weaker growth in emerging markets and a strengthening dollar. The Thomson Reuters/CoreCommodity CRB Spot Index, which tracks a range of hard and soft commodities, is now at its lowest in almost two years. The Bloomberg Industrial Metals Index fell more than 20% below its April peak last week, although it has some recovery in the last few days.

China is the world’s largest consumer of raw materials, and consequently economic and industrial trends in the country have a significant influence on commodity markets. Expectations of slowing economic growth and intensifying trade friction with the U.S. have contributed to the decline in global commodity prices over the past few months, but we see several factors to support prices, at least for industrial commodities, over the remainder of 2018.

On the demand side, government efforts to encourage and speed up infrastructure investment to shore up economic growth should offer some support for metals. On the supply side, production controls on steel and aluminum plants over the winter, intended to reduce smog, are also likely to lead to higher prices — repeating the phenomenon seen over the 2017-18 winter period.

Curbs on local government borrowing and a campaign to control corporate debt have put strong downward pressure on growth in government-driven infrastructure investment which fell for the seventh straight month in July. Official data show that year-on-year growth in infrastructure investment slowed to 5.7% for the first seven months of 2018, down from a rate of 7.3% for the first six months, the weakest increase since the data series began in 2014.

The government has responded with pledges to pursue a more proactive fiscal policy, accelerate infrastructure spending on existing projects to boost demand, and encourage banks to lend more to the real economy. Local authorities have been told to “speed up” the issuance of special-purpose bonds (which are meant to repaid from income generated by the projects they invest in) and use at least 80% of their annual bond issuance quota by the end of September, with most of the remaining 20% to be sold in October.

Banks have been told several times, most recently by the regulator, the China Banking and Insurance Regulatory Commission (CBIRC) to lend more, especially to infrastructure projects. But we don’t think these calls will be able to boost infrastructure investment by that much because there’s simply not enough funding available due to the long-term squeeze on local governments’ off-balance sheet financing under the deleveraging campaign.

We see more support for commodity and metals prices from the impact of curbs on industrial production in northern China this winter as part of efforts to reduce the severe smog that blankets the region caused by heavy-industry emissions and greater demand for heating from coal-fired power stations. The controls were first imposed in November 2017 for four months and led to a surge in steel, aluminum and coal prices along with industrial commodities as supply was curtailed. The restrictions could last two months longer this time round — a draft of the new policy circulated earlier in August revealed that production curbs could start on Oct. 1 and end on March 31.

The restrictions will cover Beijing, Tianjin and 26 other cities in the provinces of Hebei, Henan, Shandong and Shanxi, and will cap steel production at 50% of capacity, and aluminum production at 70%. Higher proportions of capacity may be available for high-efficiency plants, according to the draft.

Weekly Roundup

Macro & Finance

China’s central bank has stepped up measures to stop speculators from betting on yuan depreciation and putting downward pressure on the currency by curbing some lending activities that take advantage of special treatment in the Shanghai free trade zone (FTZ).

China announced Thursday that it will send a delegation to the U.S. later this month for trade negotiations, aiming to defuse tensions after the two countries started imposing tit-for-tat tariffs on goods and Washington tightened controls on investment.

Growth in China’s government-driven infrastructure investment skidded for the seventh straight month in July as restrictions on local government borrowing and a nationwide debt-control campaign took their toll.

Chinese banks are picking up the pace of lending as regulators push to inject more cash into an economy rattled by slowing growth and the intensifying trade war with the U.S.

Foreign investors are building up their portfolios in China’s $11 trillion bond market despite recent volatility of the Chinese currency and a stock market slump.

Unscrupulous banks and owners of financial institutions will find themselves under greater scrutiny as the planned reorganization of China’s newly merged banking and insurance regulator moves ahead over the next two months.

The brief default on a bond issued by an organization with links to the military in western China’s Xinjiang autonomous region has triggered a swift internal investigation into its chairman, as the government tries to boost confidence in a corporate bond market with growing default risk, Caixin has learned.

Companies

Tencent Holdings Ltd., which owns the WeChat social media platform, reported a rare drop in quarterly profit, triggering a further slide in its shares that wiped nearly $50 billion in market value from the company last week.

The China Securities Regulatory Commission on Friday suspended Dagong Global Credit Rating Co. Ltd. from rating debt instruments issued on China’s stock exchanges for one year. Separately, the National Association of Financial Market Institutional Investors (NAFMII), an industry association under the central bank that oversees interbank bond market, banned Dagong from doing business related to debt-financing instruments.

China’s hottest teahouse, Heytea, announced Thursday it will open a store in Singapore, its first overseas expansion. But will it be able to taste success in a tea market that has never embraced a mainland brand?

Calendar

August 27: National Bureau of Statistics (NBS) releases data for July industrial profits

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