China looks to control commodities for stability

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In the wake of record-high copper, iron ore and steel prices, Chinese Premier Li Keqiang believes the country needs to manipulate its commodities to ensure China’s economic stability.

A UBS research report suggested multiple possible avenues for China, all with potential pitfalls.

Avenues include accelerating liquidity tightening, loosening production curtailments or introducing price ceilings.

The negative effects of these suggestions were an impact on growth, environmental backlash and risk of effectiveness.

At a State Council executive meeting, Li said careful analysis had to be done.

“We must carefully analyse the reasons behind this round of rapid increase in commodity prices and focus on the crux of the issue, to adopt measures in a targeted and holistic approach,” Li said.

Other ideas to increase supply in China’s domestic market were to raise export tariffs for some iron and steel products, and temporarily removing or cutting taxes and tariffs for others.

This was referenced in the UBS report which suggested removing exports would bulk up domestic supply chains.

“If China banned steel exports it would increase supply to the domestic market, pushing prices down and reducing inflationary pressures; this would impact steel spreads, result in a reduction in China’s steel production, and in turn reduce iron ore demand and prices,” the report stated.

The report did not believe Chinese pressures would fundamentally impact international markets in the long-term, as China would look to regulate internally more than externally.

“Further restocking ex-China (all non-Chinese territories) may create near-term tightness in copper and aluminium, and keep steel markets tight, but we do not see structural shortages and believe prices will fall in 2022,” the report stated.

Li put it to the Chinese government to regulate the industry, as the market rides out this wave of volatility.

“While the market continues to play a decisive role in resources allocation to ensure the supply of commodities and keep their prices stable, the government must better fulfil its responsibility,” Li said.

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