Global View. China’s commodity pile-up could crush prices

China’s accumulating a vast stack of commodities that’s threatening markets already hammered by the coronavirus.

As the government compels the country to get back to work, oil refineries are churning out diesel and gasoline while smelters and other industrial plants continue to process raw materials into finished products such as steel and copper.

But they’re not being used quickly enough. Consumption has shrunk as people stay at home and travel less, and as logistical constraints stop output from reaching end-users.

So the commodities are piling up outside plants, in warehouses and storage tanks. Inventories of steel products last week surged to a record, while copper and zinc supplies at warehouses tracked by the Shanghai Futures Exchange expanded to the highest in nearly three years.

Gasoline and diesel stockpiles are expected to get close to their theoretical capacity this month.

That can’t go on forever. Space will eventually run out or the financial burden of holding so much inventory will get too much. The plants will either have to de-stock by selling off their products or cut production, which would reduce demand for raw materials such as crude and iron ore. Either way, it would be a blow to prices already hammered by the virus.

In a sign of how desperate the situation is getting, China’s top non-ferrous-metal industry association last Thursday called on the Central government to buy metals from smelters to alleviate pressure from rising inventories.

Steel troubles

The steel industry is also under pressure. Mills have been reining in output as demand has fallen, but there are limits to how much they can cut without closing down furnaces entirely, a complicated and costly move.

Steel product prices have fallen more than 5 per cent since the Lunar New Year holiday in January when Beijing shut down swathes of the country. Iron ore has fallen about 10 per cent.

Should mills start to restock inventories, steel’s losses could accelerate.

“There could be a price drop as traders and mills compete to shift material out from inventories as fast as possible,” said Tomas Gutierrez, a Shanghai-based analyst at Kallanish Commodities.

Any price correction would probably be short-lived, according to Gutierrez. Mills have already been cutting back production and a further drop in prices would encourage deeper cuts, helping inventories draw down. That could happen one to two weeks from now, he said.

And the demand side may also start to improve as Beijing gets the country running again, which would help reduce inventories, said Xiao Fu, head of global commodities strategy at BOCI Global Commodities.

The travel restrictions have hammered the oil market, with stockpiles nearing capacity. Gasoline and diesel retail prices are at the lowest since 2017.

Chinese oil companies have been looking overseas to help alleviate the glut. The trading arm of China’s biggest oil refiner last week made a rare booking to ship diesel to Europe, and traders are expecting flows to increase. While that may ease the pressure on domestic prices, it could be another headwind for overseas markets.

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