Surge in Commodities Prices a Risk to China Sustaining Growth

(Bloomberg) -- China's factory and construction activity held up last month, defying predictions of a slowdown, although measures to sustain growth are likely to be complicated by the surge in commodities prices that has accompanied Russia's invasion of Ukraine.

China's ferrous metals markets rallied after the official manufacturing and construction purchasing managers' indexes rose in February, even as the steel PMI fell further into contraction.  

Policy support helped soften the impact of the usual slowdown over the Lunar New Year, which was compounded this time around by industrial curbs over the Beijing Olympics, the government's efforts to contain omicron, and a worsening slump in property sales.

But now that China is heading into peak demand season for many commodities, there's a risk that consumption will be affected by higher energy costs, which underpin the price of everything from metals to fertilizers. 

China has scrambled to keep a lid on coal prices in particular. But reports that traders are backing off purchases of Russian fuel while they assess the impact of global sanctions will be a cause for concern. Set against that, the supply of industrial commodities can only improve from here as steel mills and metals smelters ramp up output after their recent curtailments. 

The National People's Congress that begins at the weekend is expected to reveal further steps to support the economy, including this year's local government bond quotas to fund infrastructure spending. The conflict in Ukraine also makes it more likely that the energy conservation policies and carbon controls which proved so inflationary last year will take a back seat to measures that more unequivocally bolster growth.  

High commodities prices continue to trouble firms, according to the commerce ministry, while the industry ministry has again warned against indiscriminate production curbs that disrupt the supply of raw materials to the industrial sector.  

Today's Events 

(All times Beijing unless noted)

• Nothing major scheduled

Today's Chart

Russia's invasion of Ukraine has catapulted the cost of shipping oil. Freight rates for hauling crude from Russia are surging as sanctions on the country push up the risks of carrying cargoes. Shipowners are offering at least double the last transacted rate to carry oil from Russia's Far East to ports in China.

On The Wire

The world's banks are tightening financial restrictions on Russian commodities. While Chinese banks have limited exposure to Russia, any increase in economic ties between Russia and China could raise their risk of facing U.S. sanctions, Citigroup said. State banks may find it increasingly hard to support China's future buying of energy from Russia, according to Bloomberg Intelligence.

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The Week Ahead

Wednesday, March 2

• Nothing major scheduled

Thursday, March 3

• China Caixin services & composite PMIs for February, 09:45
• USDA weekly crop export sales, 08:30 EST

Friday, March 4

• China weekly iron ore port stockpiles
• Shanghai exchange weekly commodities inventory, ~15:30

Saturday, March 5

• Annual National People's Congress begins in Beijing

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With assistance from Bloomberg

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