In recent weeks, the price of commodities, including metals like iron and steel, has skyrocketed. This trend poses a threat to China’s economic growth because it relies on metal commodities to support its booming construction industry and power manufacturing facilities. As a result, China has taken steps to attempt to cool metals prices.
China’s Stake in Metals
The global economy took a hit in 2020 with the COVID-19 pandemic. Infrastructure and construction spending has played a significant role in China’s economic recovery over the past few months, primarily supported by commodities like iron ore and steel. Several things have contributed to the rise of metal prices, including pollution policies, supply constraints, competition from other countries, and market manipulation. The cost of metals is of major concern to China because it is the world’s largest consumer of essential metals such as iron ore. Adding to the country’s stress is an ongoing dispute with Australia, which is China’s main supplier of iron ore.
Steps Has China Taken to Cool Prices
China has taken steps to reverse the soaring prices of metals. The Dalian Commodity Exchange, for example, has raised the trading limits and the margin requirements for various iron ore contracts. Meanwhile, the Shanghai Futures Exchange has reinstated fees for closing positions on certain contracts for steel rebar and hot-rolled steel coil futures, explicitly targeting the contracts that have the most activity.
Government officials in China warned against speculators who overindulge in speculation or participate in the dispersal of fake news related to commodities trading. In late May, the National Development and Reform Commission announced that they were going to “strengthen the joint supervision of commodity futures and the spot market” and adopt a zero-tolerance policy for malicious speculation. In particular, the commission took aim at hoarding, market manipulation, and other illicit activities related to speculation.
What Have the Effects Been
When China raised the trading limits and margin requirements for iron ore and steel contracts, the immediate response was not what China expected. Shortly after the restrictions were made, steel and iron ore contracts reached record numbers. The Wednesday after the Dalian Commodity Exchange raised trading limits, iron ore had a closing high of 1,337 yuan per metric ton. In the week that the Shanghai Futures Exchange raised trading limits on steel rebar, steel rebar reached a closing high of 6,171 yuan per metric ton, twice as high as the closing low reached in 2020 when China was in lockdown due to COVID-19. Eventually, prices did begin to fall in the aftermath. Steel rebar prices dropped 2.7% and iron ore dropped by 3%.
The price of commodities has skyrocketed recently, especially important metals. This has created anxiety for China, one of the world’s largest consumers of iron ore and steel. While Chinese authorities have taken steps to cool the price of metals, it will be difficult for China to sustain this cooldown because of ongoing supply constraints. As a result, throughout the remainder of the year, the price of metals will likely remain inflated.
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