Movers and SHAKERS
Why are the Chinese Releasing Copper, Aluminum, and Zinc Reserves?
When the U.S. Federal Reserve looks to curb producer price inflation, they may take money out of the economy to impact the demand side of the equation. When China is looking to squelch its factory gate inflation, they grow the supply side by releasing reserves of raw materials. At least that is what they announced today (6/16) related to some base metals.
China is the world’s top metals consumer. A spike in inflation of Chinese made goods would reduce the countries global competitive position. This could lead to decreased exports. For this reason, it’s in the countries best interest to cool the roaring price increases of copper, aluminum, zinc, and others. Prices have been surging this year in reaction to post-pandemic spikes in demand and some speculative buying around the commodities. With today’s announcement, speculators are warned that buying may lead to unintended “pain.” This alone helps to tame prices at the producer or factory stage.
Background/ What is Impacted
Chinese factory gate inflation is the rough equivalent to the U.S. Bureau of Labor Statistics measure of producer price inflation. Factory gate prices jumped to the highest level in over 12 years during May. The higher costs cut into profit margins of final product producers because much of the cost was not able to be passed on to consumers. Global price pressures have been on the rise in many countries as policymakers have been working to revitalize post-Covid-19 economies without unwanted inflation. The balance needed to achieve both has been a growing challenge.
Prices on copper contracts on the Shanghai Futures Exchange and the London Metal Exchange hit record highs in May, after having risen more than 60% since March 2020 as the reaction to the pandemic began to affect global markets. On their website, the Chinese National Food and Strategic Reserves Administration said that it will release reserves for public bid including copper, aluminum, and zinc in batches for nonferrous processing and manufacturing. The sales are not completely unexpected by metals traders as Chinese regulators have been stepping up efforts to cool commodity prices in recent weeks.
The Chinese authorities are trying to help support the margins of its manufacturing industry as passing along manufacturing costs to end consumers have not been overly successful. This bodes well for the argument that recent spikes in inflation may be temporary and related to spikes in demand that will level out over time. The Chinese National Food and Strategic Reserves Administration is doing its part to add supplies at a time when demand and speculation of increased demand is at an abnormal peak. The move may help to calm the volatility we have seen in other parts of the world in commodity prices.
Today the Federal Open Market Committee (FOMC) will end their two-day June meeting where U.S. inflation is on their agenda as well. The world markets await being updated on the Fed’s plans for scaling back what are seen as inflationary monetary policies. The Fed statement post meeting typically is made public at 2 pm following the FOMC’s adjournment.
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