As the world returns to a sense of normality, the clutches of COVID-19 have still not completely released their grip on society. Even though most countries have eased restrictions and switched their economic machine back to full force, China’s zero-COVID policy remains an unmistakable hindrance to global supply chains. From consumer electronics to food stores, production, no matter where or what on the planet is in question, is largely gimped. Certain raw materials are in greater demand than ever for the time being, while others have slipped already, but ongoing Chinese lockdowns are causing a domino effect of collapse that’s almost inevitable for some commodities.
Shanghai’s Seemingly Never-Ending Shutdown
Lengthy Chinese COVID-19 lockdowns combined with the country’s ongoing property sector crisis have caused demand for specific materials like steel, cement and glass to plummet. The already lowered demand is worsened by recurrent lockdowns, the most recent of which has kept millions of Chinese citizens locked in their homes for over a month while disrupting almost every single major business. Shutting down Shanghai, Shenzhen, and forty-three other cities is stifling both supply and demand. When coupled with the vastly diminished state of property development and slowed general manufacturing, certain specific prices have come crashing down from their temporary highs.
Construction Efforts Curbed By China
Over the course of April 2022, during a period of the year when steel consumption is conventionally at its highest, demand for the main steel products like rebar, wire rods and coils diminished by at least 3%. One must keep in mind that the Chinese property sector alone consumes roughly 15% of the world’s steel demand, and China is currently shifting away from a property-driven growth model. Dwindling steel demand is likely to be an ongoing issue for quite some time. Iron ore is in a downtrend that experts like Fitch Solutions feel will last for multiple years. For two decades, steel has driven Chinese economic growth, but credit lines are significantly tighter, which translates to far less activity from the construction sector.
Raw Materials On A Rough Ride Down
Chinese stainless steel futures on the Shanghai Futures Exchange dropped by a full percentage point over April 2022, while Shanghai nickel futures slipped by a whopping 6.8%. Rebar set for delivery in October notched down 0.1%, while hot-rolled coils dropped 0.6%. Even benchmark iron ore futures on the Dalian Commodity Exchange set for delivery in September experienced a 0.9% drop, while spot prices for iron ore itself fell for four sessions in a row to their lowest price since the end of February. Coking coal futures on the Dalian exchange also dropped by 0.9%. Even palladium fell 13% from its peak high.
Demand And Production Down
When it comes to materials directly tied to construction, the plummet in demand, sales and pricing are just as immense. In the first quarter of 2022, Chinese cement production dropped by 12%, while the 18% lower year-on-year turnover of China Resources Cement is a strong indication of just how much less activity there is in the sector. Driving raw material production and prices even further down is the decarbonisation of China as it enforces restrictions on production growth and capacity in order to reach its carbon emission reduction target.
The Rise And Fall Of Specific Commodity Prices
The current state of China’s economic development and the fight against COVID-19 may be causing the widespread collapse of certain raw materials, but others are on the way up with no signs of retracing to affordable levels. Copper, nickel, cobalt and battery metals like Lithium may have weaker demand, but their prices have yet to normalise to regular tradable levels. At this point in time, even if China lifts its lockdown and chooses to enforce no further restrictions, there’s no telling when prices and demand will finally normalise.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only