How China Is Increasing Its Influence On Global Commodity Markets

Iron ore prices hit an all-time high of $230 in May 2021, but just four months later, the prices have already fallen by more than 50 per cent. Aluminium prices hit an all-time high recently, on the back of a demand glut. The high volatility in the commodity space has one reason — China.

In the case of iron ore,China is responsible for almost 50 per cent of the world’s steel output. During the first half of 2021, Chinese steel output had already increased by 12 per cent over the previous year. The rapid recovery in steel and high demand fuelled iron ore prices to new highs. But with the high price of iron ore, the Chinese government swooped in to crack down on what it considered to be an overheated market. Its National Development and Reform Commission began investigating the spot iron ore markets and cracking down on hoarders.

The crackdown, and the consequent increase in supply, began pushing global iron ore prices lower in June. In May, China also increased export taxes and tariffs to lower domestic prices by disincentivising exports.

Further, today China is looking to curb steel production as it seeks to cut down on emissions and also keep prices of input materials low. Steel is a power-intensive sector and therefore the government has placed curbs on steel production. Though China has set output cut targets for provinces, only a few seem to be on track to make these cuts. The plans to curb emissions from the steel sector date back to 2013, when the government had asked its largest steel production province to cut down on steel production capacity by 60 million tonnes by 2018.

The cut in steel production has only propelled global steel prices upwards, whereas the price for iron ore has continued falling.

Other commodities like coal have seen their prices increasing as China struggles to procure coal in order to keep its economy running. Coal prices reached an all-time high with the increasing demand from China, which is the largest consumer of coal in the world.

Aluminium has seen its prices skyrocket after Chinese smelters began production cuts due to the lack of power supply and in order to comply with emission norms.

The Evergrande crisis is another reason for panic in the commodity markets. China achieved this supremacy through years of debt-fuelled growth in industries and infrastructure. But today, with the property sector faltering and the Chinese government wanting to cut back on debt, the growth could falter.

The property and infrastructure sectors contribute to a large part of China’s gross domestic product (GDP), and with a slowdown commodity prices could crash. The slowdown could begin with businesses but could also lower the consumption of China’s 1.4 billion people. Even the food industry could face a crisis due to production cuts by animal feedstock producers.

The rapid rise and fall in these commodities show how dependent the commodity markets are on China. China is either the single-largest seller or buyer in many of these commodities making China’s economy trajectory extremely crucial for commodity markets.