China’s demand for commodities is expected to weaken in the second half of 2021, according to analysts, but this will be largely offset by stronger demand outside of China and the global shift to a low-carbon economy.
The development of the more virulent Delta strain of coronavirus has hampered mobility and growth forecasts, putting pressure on commodities in recent weeks. However, central banks have signalling more aggressive policy positions, with several announcing a reduction in bond purchases.
The vigourous drive in China to put inflationary pressure on industrial metals prices, such as steel, is a third issue. After the run-up that brought copper and iron ore prices to all-time highs, the situation in the second half will be more unpredictable.
Coal
Spot prices for coking (metallurgical) coal have risen since the start of May, but the CBA analysts believe a peak is building, as some steel product margins are now declining.
However, thermal coal prices have remained high due to supply concerns and seasonal demand from a warmer-than-usual summer in North Asia. Thermal coal prices have climbed thrice since the commencement of the pandemic, according to Longview Economics.
Over 2020, China’s coal power capacity increased by 3%, while additions outside of China totalled just 9GW and retirements were 25GW. While a result, China’s coal capacity continues to expand even as the rest of the world cuts back.
Iron Ore
China’s economic report for June is unlikely to allay fears of slowing growth. As a result, ANZ Bank analysts expect that downward pressure on iron ore prices will intensify.
Despite the fact that the market remains tight, a severe correction is unlikely. While demand outside of China may be able to compensate for some of the downturn, iron ore prices are projected to fall in the second half, albeit the decline will be limited.
Source: Factset
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