Whether you're talking about steel, copper, soybeans or corn. China has a dominant position in almost all commodity markets. This grip only strengthens the country to ensure economic growth. This results in a speculative character of the market.
The country has built up enormous stocks of all these raw materials. These are intended to absorb sudden spikes in price – or a loss of supply. Many of these accumulated stocks of grain have been sold in recent years. This will happen soon in the field of precious metals. That is special because China has not done this since 2005. The People's Republic hopes to send a 'bearish' signal that discourages speculation.
Pressure the mood
Chinese companies are very bullish when it comes to raw materials. Not only with metals but also with agricultural raw materials. A poor domestic harvest and reconstruction of the pig herd have caused this in the agricultural sector. The government is therefore asking commodity traders, brokers and steel companies to take a less bullish position. Primarily on Chinese commodity exchanges. The Chinese government has had such a policy before, the news site wrote Bloomberg.
Commodity prices – from iron ore to soybeans – are at their highest price level in 10 years. China therefore fears for the growth of their economy in the recovery period after the corona pandemic. Sharply rising prices due to expensive raw materials are undesirable and there are fears of rising inflation.
The government intervention is clearly visible in the prices of steel, for example, which have fallen sharply since Prime Minister Li Keqiang's statements in mid-May. Another measure being taken is limiting loans that commodity traders can take out to take positions on commodity markets. Stock market analysts doubt whether government policy is the only reason why commodity prices are falling. This price movement is visible worldwide. Moreover, it may be temporary. For agricultural raw materials, favorable weather conditions in the US mean that corn and soy are now doing well there.
Decreasing grain supplies
Reporting from China is mainly focused on raw materials used in the manufacturing industry, which largely drives the country. Parallels with the agricultural markets can certainly be drawn. The country has enormous agricultural reserves. They must ensure that the 1,4 billion inhabitants are provided with sufficient food and that the livestock can be fed. For the first time in 8 years, these huge stocks - the quantities of which are not disclosed - have fallen this season. Corn in particular has become scarcer because our own harvest was very disappointing.
With declining grain stocks, the country has started a huge buying wave in South America, the US but also Europe. This is in line with the policy that everything is no longer purchased in the US, but also in other countries. During the trade blockade, almost all soy came from Brazil. That was not possible this season due to a severely disappointing harvest there, from which the US is still benefiting. The new harvest is also already selling well to China. On Friday, June 18, it was announced that the country had purchased 8 shiploads of soy. Other raw materials such as corn and sorghum are also in demand.
Price fall in pork
The Chinese government is dealing with more price whims, according to Reuters. The state-controlled Chinese livestock farmers' organization CAAA called on pig farmers on Monday, June 21, not to speculate on this market. Pig prices have fallen by 65% since the start of this year and pig farmers fear that the bottom has not yet been reached. This causes panic among farmers. Precisely because last year she gambled on rising prices, which resulted in more investments in fattening pigs.
This is now the second warning in a short time, although it is rarely heeded. Pork prices fell again on Monday and margins have now fallen to their lowest level since 2014. The price level on the Dalian live pig futures market has fallen by 37% since the beginning of May. This is a major blow to the pig sector in the country, which is being rebuilt after an unforgiving outbreak of African swine fever in 2018. Breeding sows that were retained for the production of more piglets are now being sold quickly. There are still many animals, especially among small Chinese pig farmers, which continues to put pressure on the market.
To protect farmers in the country from significantly higher costs, the government announced on June 18 that it would release a total of 20 billion yuan ($3,1 billion) for the purchase of fertilizers and diesel, among other things. Prime Minister Li Keqiang hopes to give companies confidence to sow and harvest sufficient crops. A (too) small domestic harvest means that the country will once again have to work hard to purchase raw materials worldwide. Due to the 40% increase in the price of crude oil, the costs of diesel and fertilizer have increased significantly this year. In addition, stocks are also small. The Ministry of Agriculture is therefore simultaneously calling for more fertilizer to be produced.
Domino effect
A collapsing pig market in China could set off a domino effect on the raw materials market, when pig companies can no longer purchase expensive raw materials and require less feed. Consumption for the 2021/22 season is estimated to be very high due to a recovered pig sector in the country. The Chinese government's hoarding policy and high demand for feed raw materials are noticed worldwide, including us. China purchased quite a bit of European feed wheat last season and 1,3 million tons of wheat has now also been booked for shipping for next season. If this demand disappears, other destinations will have to meet the demand.
Can government intervention control the prices of products and futures markets? International analysts and traders wonder about this. China may be a dominant player worldwide, but the price of raw materials is ultimately determined internationally and shaped by many factors. Constantly intervening has a disastrous effect in the long term. However, the question is whether China also realizes this.