China: What factors will support steel, coal markets uptrend in H1?

• Policy measures paying off as PMI rises 50%
  
  
• Liquidity measures triggering global inflation
  
  
• Demand for steel, raw materials stable but 'supply shocks' a worry
  
  
• Russia-Ukraine cutting off commodity supplies
  
  
• Resource nationalism aggravating supply-side issues
  
  

Morning Brief: If there are no major developments that could impede growth, it is expected that China's steel and coal markets will show an uptrend in the first half (H1) of this year, mainly driven by three factors.

1. State measures to stabilize growth: To ease the downward pressure on the economy and stabilize growth, China successively introduced a series of measures. These include approval of fixed asset investment projects, easing of the real estate market, reduction of bank deposit reserve ratios, "interest rate cuts", and early issuance of local government bonds. The effectiveness of the above measures has begun to show. A large number of investment projects have started. In February, China's manufacturing purchasing managers' index (PMI) was 50.2%, up 0.1 percentage points from the previous month. In the first two months of this year, the import and export trade started well, showing double-digit growth. It is expected that demand for steel and coal will grow steadily through the year, laying a solid foundation for the improvement of the same throughout the year.

2. Steel, coal not immune to global inflation: Because central banks around the world, especially in Europe and the United States, implemented effective monetary policies, liquidity was injected which triggered severe global inflation. At present, almost all commodities in the world are overheated. International oil prices have risen since December 2021, and by February this year, crossed USD30/barrel in just two months. Brent crude oil futures in March rose above the $100/barrel mark. Oil prices in the international market will likely break through the USD150/barrel mark or even reach USD180/barrel. In addition, container freights on major global routes have spurted. Driven by this, the inflation rate in major countries in the world has hit a new high, with the US reaching the highest level since 1982.

The driving force of inflation this year is not only from the excessive liquidity, but also from the recent conflict between Russia and Ukraine, which has pushed up global oil and gas, coal and other commodity prices. The high prices of these upstream products will also drive up electricity and fuel prices, food prices, logistics costs and wage costs, and downstream industry costs will also rise, resulting in even more fierce price increases. This is the so-called "dead loop", where rising prices push up costs, which raise prices, which raise costs again.

Trade protectionism implemented by the United States and other Western countries and mutual increase of customs tariffs have also increased import costs and stimulated price increases.

In conclusion, we are in an environment of headline inflation.

Thus, the upward push for steel and coal will continue for some time.

3. Geopolitical risks, Covid, supply shock: The dominant factor affecting prices of steel, in addition to the above-mentioned costs, is the supply and demand balance.

Demand for steel and raw materials is stable this year, and the steady growth trend will not change significantly through the year.

However, in terms of supply, there will be some uncertainties, which will cause one of the three economic pressures.

The biggest trigger for the recent surge in commodity prices comes from market concerns about "supply shocks" which this year may come from three sources:

• Geo-political risks: Due to the outbreak of the Russia-Ukraine conflict, "cut-off" of important commodities has been strong, resulting in a sharp rise in global commodity prices. The Bloomberg Commodities Spot Index, which tracks 23 futures contracts, rose 4.1% on 1 March, 2022. The index has more than doubled from a four-year low hit in March 2020, at the start of the pandemic, for the biggest gain since 2009. Among them, on 1 March, crude oil futures in New York rose above USD105 per barrel, the first time since 2014. Brent crude oil soared to around USD120 per barrel, nickel hit a record high, zinc crossed USD 4,000/t. Coal, especially thermal coal, also surged. Commodity prices due to sanctions and supply chain disruptions are expected to continue to rise or remain at record highs until the situation eases significantly.
  
  
• Resource nationalism: The concept of "resource nationalism" has emerged of late. Once there is a shortage of resources, or a possible shortage, almost all countries use the excuse of "prioritizing their own interests" to reduce or even stop production of related products. For example, Indonesia once stopped the export of thermal coal and bauxite, and recently, export of nickel ore. India also stopped exports of iron ore. In addition, some countries will use resources as weapons to attack the economic development. For example, there have been "oil weapons". "Resource nationalism" is on the rise, which may also cause "supply shocks" for steel and coal.
  
  
• Uncertainty on Covid: At present, the global epidemic scenario is still serious, and there is no sign of it ending soon, which will have an impact on production and consumption.