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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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China’s Industrial Slowdown Could Kill The Commodity Rally

Industrial Commodity

One of the biggest drivers of the surge in metals prices this year, the world’s top commodity consumer China, is showing signs of a slowdown in demand, which could drag down copper and iron ore prices for the rest of the year after a blistering rally in the first half. 

Chinese factory activity growth slowed down to the smallest in 15 months, imports of copper and iron ore are also slowing down amid surging prices and curbs in China’s steel manufacturing, while authorities are releasing metals stocks from reserves to cool rallying prices which raise manufacturing costs. 

All these factors from the past few weeks are bearish for the Chinese demand—and as a result, imports—of metals such as iron ore, copper, zinc, and aluminum, Reuters columnist Clyde Russell notes

Although analysts say that slower Chinese demand doesn’t necessarily mean lower commodity prices, because of tight global markets, China may not be a key driver of metals demand through the end of 2021. That’s because of slowing factory growth, authority-mandated caps on steel manufacturing, and the release of tons of metals from China’s reserves. 

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) showed this week that Chinese factory growth was at its slowest in July in 15 months, also because of high raw material prices, especially for industrial metals.

Related: Why Norway Won’t Give Up On Oil & Gas At the same time, China’s imports of iron ore, the key material for steel manufacturing, fell in June to the lowest in 13 months, slipping by 0.4 percent from May and by 12.1 percent from June 2020. 

China moved to cap steel production and steel exports this year as part of its pledge to reduce emissions. Chinese authorities have implemented a policy to keep steel output flat at 2020 levels

Following a 12-percent jump in steel production in the first half of the year, this policy means that Chinese steel manufacturing will likely drop in the second half of the year, dragging down demand for iron ore, too, analysts tell Global Times.

“Cutting production is the main theme for the entire steel industry for the rest of the year not only because of environmental goals but also the unsustainability for firms to produce so much steel when the cost is so high,” a steel industry insider told the Global Times this week. 

“China steel mills’ restrictions could result in around 75 million tonnes less iron ore demand in the second half,” analysts at UBS said in a July note carried by Reuters. 

The curbs on steel production in China have already resulted in lower iron ore prices. 

China’s copper imports have also slowed down in recent months, customs data shows. But copper scrap imports have been surging, doubling in the first half of 2021, according to metals intelligence firm Roskill. 

As manufacturers replace the more expensive refined copper with scrap, “This would unquestionable result in a decline in Chinese refined consumption in 2021- a hugely negative factor for world copper prices to surmount, despite the evident recovery in demand in the Rest of World,” Roskill said last week.

“Watch out copper. A great wall of scrap is still heading in China’s direction,” the intelligence firm said. 

Related: Analysts See Oil Trading Closer To $70 Through Year-End

Copper prices could also drop because of Chinese sales of tons of metals, including copper, from state reserves. 


“Chinese policymakers are committed to curbing any excessive gains in commodity prices, which may deter some financial investors from re-entering the market, especially considering the uncertainties in the broader market as the Fed moves to taper asset purchases,” Wenyu Yao, Senior Commodities Strategist at ING, wrote in a July 20 note

For copper prices, “[W]e may end up drifting around somewhat blindly this summer before further downside risks emerge in late 3Q21 and 4Q,” Yao added. 

Demand across most commodities in China is expected to slow down in the second half of 2021, Wood Mackenzie said in a new monthly China Economic Focus report last week. 

“China’s economy is expected to slow down in H2 2021. Slower export growth, rising commodity prices, lacklustre infrastructure investment and expiring subsidies will all drag down the country’s GDP growth. As a result, we should see a deceleration of commodities demand in China,” Wood Mackenzie senior economist Yanting Zhou said.

By Tsvetana Paraskova for Oilprice.com

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  • George Doolittle on August 04 2021 said:
    This is spot on and as well the Chinese Authorities have been ordered to crackdown on all tech names and the Chinese military continually threatens trade routes across the Asia Pacific Region so hardly an "East Asian co-prosperity sphere" would be an understatement.

    There is also the all to real risk of a Civil War breaking out from all of this as is true of Putin's Russia as well...which may drive both powers towards War with one another in point of fact.

    Either way this is all exceptionally bearish for commodity markets which have it must be said recovered from the wholesale collapse suffered when Putin formally invaded Ukraine in what is now known as the "War in the Donbas" and indeed as Turkey has done in Syria and now Israel has done in the West Bank.

    Again all very bearish ... and ongoing...for those speculating in the commodity market...and of course bad news for the US economy which of course is a major commodity producer in addition to being a major producer of finalized OEM "finished goods" products from said commodities which we would like to trade at minimum with Canada but of course the World as well.

    Of course the US economy runs mostly upon internal demand to drive economic growth so most of what is observed or seen as good or bad is in the form of interest rates and borrowing costs both of which continue to be a very positive for US economic growth going on 18 Months now.
  • Mamdouh Salameh on August 05 2021 said:
    Flashy headlines don’t detract from the fact that China’s economy is growing this year at 8.3%, the highest among all major economies according to the IMF.

    It never crossed the author’s and other analysts’ minds to think that China’s slowing demand for commodities like copper, iron ore, zinc and aluminium isn’t a sign of industrial slowdown but a deliberate action to slow down the blistering rally in their prices.

    The fact that China has been releasing metal stocks from its huge reserves, imposing a deliberate curb in its steel manufacturing to reduce emissions and rising copper scrap imports is part of its action. All this doesn’t affect the growth of its economy in any shape or form.

    Moreover, China’s action to force prices of commodities down isn't dissimilar to the United States manipulation of crude oil prices in order to reduce its oil import bill.

    The author and analysts shouldn’t rush into hasty conclusions before they learn all the facts.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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