China slowdown to put pressure on metal and energy commodities

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While lockdown-related restrictions in parts of China in recent months caused a slowdown in commodity import volumes, there is a hope that economic activities will begin to normalise soon.

It is likely that the demand for commodities covering energy products, industrial metals, and key agri goods would pick from hereon for the Asian major. However, even as major cities like Shanghai reopen, high commodity prices and slower export growth would be a constraining factor for China’s imports to pick up in the months ahead.

Data for May points to a decent import growth in dollar terms (over 16 per cent), but it can be explained by the elevated international prices of key commodities such as crude oil.

China’s commodity import volumes — for utilisation in manufacturing export products — are more likely to be affected due to visible slowdown in demand for Chinese manufactured goods in the developed economies. Typically, a third of the imported commodities are used by China’s export sector.

China’s trade data for the January-May shows a fall in the import volumes of major commodities, particularly energy products, including crude oil, coal, natural gas and LNG. The slowdown can be attributed to high prices and the high cost of sea-borne trade.

The only exception is copper imports which has gathered momentum so far this year. At the same time, China’s export shipments of steel and aluminium show strong growth despite some barriers. Falling production of these two industrial metals in other parts of the world has provided China with a window of opportunity.

Looming stagflation risk

In a recent report, World Bank has highlighted the looming stagflation risk amid a sharp slowdown in growth. The pain of stagflation could persist for years unless major supply increases are set in motion, it has warned. The Russia-Ukraine war and its consequences are now expected to slow global growth to 2.9 per cent in 2022 given the high commodity prices, supply disruptions, and inflation, the bank has said.

This may force the advanced economies to further tighten their monetary policy, which in turn, could lead to financial stress in some emerging markets and developing economies, it is pointed out.

As the mover and shaker of the global commodities markets, developments in China continue to engage the world’s attention. It is clear that China’s import demand has been weak so far and there is nothing to suggest that growth, and in turn commodity demand, is going to pick up anytime soon. Importantly, China’s GDP growth rate in 2022 is expected to plunge to 4 per cent.

(The author is a policy commentator and commodities market specialist. Views are personal)

Published on June 10, 2022