China’s Crack Down on Supply – The Implications on Industrial Metals

China consumes half of the world’s raw materials and is expected to remain one the world’s leading influencers in the industrial metals sector.

2017 saw Beijing impose a revolutionary crack down on excess steel-making capacity and inefficient mills in an effort to improve air pollution, which had plagued its industrial provinces for decades. The crackdown offset the drop in domestic demand which followed a tightening of monetary policy and slowdown in the residential property market, much to the relief of miners which feared a decline in demand from the world’s largest consumer would impact on global prices and eat into their margins.

With the capacity cuts scheduled to continue into 2018, it is likely that industrial metal prices will be sustained. Steel prices will benefit from reduced production capacity, tightening supply and in turn supported prices, and high grade iron ore demand will be on the up thanks to the focus on moving production to mills with the greatest efficiencies which require higher grade iron ore to realise the sought-after environmental benefits.

Looking away from China now to South America, where in Peru and Chile planned labour contract reviews could result in copper supply disruptions. Copper is currently trading around the $7,000 mark and although there is plenty of supply to meet demand, the high price means that laborers are unlikely to be willing to give much ground during renegotiation. If strikes end up taking place during these contractual reviews, up to 25% of the world’s copper supplies could be affected. Prices could as a result see further support over the coming months.

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