Soaring metal prices spell trouble for China's recovery

Soaring metal prices in China are hampering the country’s effort to recover from the coronavirus pandemic and throwing its plans off course.

The cost of everything needed for the Asian country’s post-pandemic infrastructure boom, from steel and coal to glass and cement, is increasing markedly.

The price of rebar, a type of steel used to reinforce concrete, has recently gone up to 6,200 yuan ($965) per metric ton in Shanghai, up 40% this year, and a new record high.

Iron ore, which is used to make steel, has hit 1,240 yuan per metric ton ($194) on the Dalian Futures Exchange, a 25% rise since the start of 2021.

Thermal coal, glass and aluminum are hitting all-time highs there with the price of plasterboard going up too.

The situation with steel has become so severe that officials in Beijing are warning of damage to the economy.

The increase in metal prices has led to the more frequent use of a popular idiom for defenseless - "without an inch of steel in hand" - on social media to describe desperate buyers.

"Global commodity prices are rising because stimulus by major economies are pushing up the demand," said Zhou Hao, a senior emerging markets economist for Commerzbank. He added, "the United States and China are both the drivers."

Expensive construction projects are already causing some Chinese firms to suspend work, according to recent survey data and analysts are warning that as smaller businesses weigh whether to cut costs or scale down, they could begin shedding workers.

"Small businesses are facing even tighter cash flows, because they have less negotiation power when prices increase in their upstream sector," wrote Luo Zhiheng, chief macro analyst for Guangzhou-based Yuekai Securities. "They either have to accept higher production costs, or cut their production and sit on the sidelines."

Meanwhile, the country’s main industrial commodities tumbled on Thursday after the government announced measures to keep a lid on increasing raw material prices.

On Wednesday, China's cabinet announced it will strengthen management of commodity supply and demand to curb "unreasonable" prices. It also said it will launch an investigation into behavior that bids up commodity costs, spooking China's hoards of metal traders.

Analysts at ANZ said steel and iron ore prices remain supported by strong seasonal demand, record high steel production, attractive steel margins and subdued supply.

"China’s measures to curb steel production and exports were not much help in containing the price rise. Falling iron ore inventories reflect strong underlying fundamentals," ANZ said.

China, the only major economy to dodge a recession last year when the pandemic began, launched a $500 billion infrastructure-led plan to support its recovery from the slowest rate of growth in decades.

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