Global commodity prices have begun to soften as China’s economic juggernaut slows. The prices of steel, zinc and aluminium have fallen in the past three months. China’s manufacturing sector growth rate has dropped to February 2009 levels, when global markets had just bottomed out after the Lehman impact. While absolute price levels still remain above the year-ago levels, the softening of commodity prices is expected to impact Indian companies in coming quarters.
Even the Reserve Bank of India (RBI) has taken note of the likely impact of the slowing of China’s economy on commodity prices and India's inflation rate. Presenting the quarterly review of monitory policy last week, RBI Governor D Subbarao had said “with increasing uncertainty about the pace of global recovery, global energy and commodity prices have softened. This trend has been reinforced by the slowdown of the Chinese economy.”
RBI is optimistic that this fall in commodity prices will help its own strategy for managing inflation.
Prices of commodities across classes have been falling since the middle of April, when China clamped on property speculation and introduced tighter credit controls. The uncertainty due to problems in Greece added to this.
In the past three months, all those commodities where Chinese output is expected to outpace its own requirement have remained weak.
Overall prices of metals are lower by 8-24 per cent since April. Steel is down 15 per cent, iron ore 25 per cent and petrochemicals, such as benzene, naphtha and PVC, are lower by 9-13 per cent.
China has a huge surplus in petrochemicals and polymers; in zinc, steel and aluminium, it is having higher than required supplies.
“A fortnight ago, China withdrew rebate on exports of steel products. This will further bring down steel production in China. Hence, the prices of raw material for steel, like iron ore and coal, could moderate, which should help Indian steel companies in bringing cost of their raw material down,” said Seshagiri Rao, joint managing director and group CFO at JSW Steel.
China turned a net importer of coal in recent months and in June, its net import was 10.8 million tonnes. The price of the benchmark Richards Bay Coal Spot/SA has moved up by 4.6 per cent since mid-April.
Iron ore spot prices are at $141 against $186 in April.
“On a year-on-year basis, steel prices would remain firm on account of significant increase in the raw material prices,” said Manoj Mohta, head of Crisil Research. “Steel prices will rise from $470-475 per tonne in 2009 to $625-650 per tonne in 2010. Despite the rising steel prices, the operating margin of domestic steel manufacturers without captive mines will decline by about 3-4 per cent by 2011-12. In contrast, manufacturers with captive mines will enjoy a stable operating margin.”
Most Indian companies are dependent on external supplies.
“Global steel prices have declined in recent months due to the expected slowdown in demand from China. In the near term, reduction in metal prices, such as steel and aluminium, would help improve operating profits for end-user industries like automobiles on a quarter-on-quarter basis,” Mohta added.
A petrochemical industry source said prices of polymers and petrochemicals are expected to remain around current levels, which are lower by around 10-15 per cent compared with the mid-April prices, as many refineries abroad have started using gas as feedstock, which is cheaper.
Chinese production of non-ferrous metals and steel increased sharply during the first half of 2010. Gains were generally over 20 per cent, with the increase for aluminium closer to 50 per cent despite repeated efforts by the government to curb output.
Explaining the reasons behind the correction in metal prices, the London-based Natixis Commodity Markets said in a report: “The desire of the Chinese government to rein in some of the excesses of its recent incredible growth seem to be taking effect.”
Prices of aluminium, zinc, lead, nickel and steel have fallen between 9 and 25 per cent in the past three months.
“Over the next few months, the weakest commodity sectors are likely to be those in which Chinese production growth is outpacing its own domestic requirements,” Barclays Commodities said in an analysis. “Steel, aluminium and zinc, all fall into this category, with steel in particular hit by the recent weak sentiment in the property sector.”
China’s zinc imports fell in June and have been consistently falling since. The fall in imports is surplus production at home and a softening in demand for galvanised steel.
Nickel prices are down by 25.5 per cent and lead has fallen by 12.8 per cent over the past few months.
Natixis is, however, optimistic about the future of metal prices. “In 2009, the only developing country that mattered was China. In 2010, the developing country growth story has broadened to the other BRIC nations (Brazil, Russia, India), as well as fast growing economies such as Indonesia and Turkey.”