China’s Plenum Promises Cues for Commodity Bulls and Bears

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(Bloomberg) — Chinese commodity markets entered the second half of the year on a downward trajectory, raising expectations that next week’s major policy meeting in Beijing will show how the government plans to deal with problems related to excess capacity and slumping demand.

The third session of the European Parliament is usually a forum for longer-term political and economic reforms, and the general feeling among observers is that major initiatives are unlikely this time. But changes to the political framework could have serious consequences.

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Paul Blochham, HSBC Holdings’ chief global commodities economist, said there was a view that China was likely to provide more support for its economic recovery, but investors had no clear idea of ​​how reliant it was on raw materials. “We’re watching and waiting to see what happens in the real estate, infrastructure and manufacturing sectors,” he said.

China is the world’s largest importer of goods and its dominant supplier of clean energy, so decisions made in Beijing reverberate around the world. Policies addressing the energy transition, President Xi Jinping’s “new productive forces” in high-tech industries and unified national markets are likely to have a direct impact on the supply and demand of commodities. Other areas that could provide signals for optimists and pessimists alike include the housing crisis, tax and debt issues, and rural reform.

Solar

The solar sector is in a tough spot. Overcapacity and fierce competition have pushed prices to record lows. Meanwhile, the grid is struggling to handle all the electricity generated by China’s global rollout of renewable energy. Solving the industry’s problems has become a top priority for Beijing, which is counting on solar as one of its “three new engines” of economic growth.

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If the plenary session focuses on unifying China’s regional markets, the grid would be a great place to start. Much of China’s solar power comes from large bases in the interior, far from the country’s big cities. Nationwide trade that allows clean energy to be delivered where it’s needed, based on market prices, would certainly help solve the industry’s problems of bottlenecks and waste.

This could mean more spending on grid connections, which would also help boost demand for metals such as copper and aluminium.

copper

Copper prices have retreated from record highs hit in May as buyers in China balk at higher costs as the economy struggles with deflationary factory prices and a prolonged property crisis. The price decline has helped to restore consumption to some extent, but to support that, the market may need to see more evidence that copper demand is central to Beijing’s plans to revive the economy.

Citigroup expects the plenary session to provide greater support for investment in the electricity grid and clean energy, as well as more help for the housing market. Despite all the environmental benefits of copper, housing remains a major source of consumption, including the appliances that typically accompany a home purchase.

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Xi’s plan to nurture emerging technology-based industries that will help China transition from the old economy to the new could also be a focus. In transportation, that certainly means electric vehicles, said Li Xueqi, head of the Tripartite Chaos Research Institute. But measures to boost growth in the so-called low-rise economy — drones and even flying cars — as well as more basic initiatives, such as digital traffic management systems, could also boost demand for metals like copper and tin, he said.

steel

The steel market remains a bastion of the old economy, and it has taken one of the biggest hits the country’s housing market has ever taken. Even more housing support in the full session won’t get the economy moving, because demand for steel is driven by new construction, not cheaper mortgages or the sale of unsold homes. China simply doesn’t need as many homes as it used to.

But restructuring the country’s finances away from debt-laden local authorities could be a win for the market, according to Vivek Dhar, an analyst at Commonwealth Bank of Australia. “The shift towards more central government debt and less local government debt opens up more spending potential,” he said.

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This could mean more government spending on public works – through increased spending on steel markets – though it must be said that Beijing has so far avoided the massive profligacy that characterized previous recessions. Infrastructure spending has become less steel-intensive as the economy matures, anyway.

Oil refining

Few markets are as threatened by China’s shift to clean energy as crude oil. The country’s rapid embrace of electric vehicles means demand in the world’s largest importer may have already peaked. And more pro-EV policies will be unpopular with refiners facing an unprecedented overcapacity.

But the plenary session may hold another unpleasant surprise. Beijing may consider measures to raise money by expanding tax collection, an unwelcome development for the more obscure corners of the industry that have already come under scrutiny over their tax affairs, says Amy Sun, a project manager at GL Consulting in Guangzhou.

China’s independent refiners, or mini-refiners, have a history of avoiding taxes to shore up their thin margins. About 40% of the gasoline and diesel sold by small refiners went untaxed last year, according to research by China National Petroleum Corp., the country’s largest oil company.

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The reform would “incentivize local authorities to monitor independent refiners’ compliance with taxes, leaving little room for tax evasion,” Sun said. That could further crush profits in a sector that accounts for about a quarter of the country’s oil processing. The result could be less than teapots, Sun said — and a solution of sorts to the country’s energy surplus.

Legumes

Rural reform and food security remain high on Beijing’s agenda. Indeed, the long view suggests that China, despite its vast size, does not have enough farmland relative to its population. According to research by JPMorgan Chase & Co., China has only 7% of the world’s arable land, but it feeds about 20% of the world’s population, making up any shortfall through imports.

But there are short-term pressures that Beijing may need to address. Farmers have seen their incomes fall as abundant supply and weak demand have combined to weaken prices for staples like wheat and corn. At the same time, increasingly volatile weather — in recent weeks, the country has seen flooding in the south and drought in the north — poses a longer-term threat to domestic production, potentially forcing the country to rely more heavily on imports.

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Among the measures that may be announced at the plenary session are freeing up more arable land, giving farmers financial support to use this land, and enhancing the country’s ability to recover quickly from extreme weather events.

On the wire

China’s struggling solar sector will continue to face tough times in the near term as oversupply in the market suppresses profits, major solar manufacturer Longi Green Energy Technology said.

This week’s diary

(All times are in Beijing unless otherwise noted.)

Tuesday, July 9:

• China to release June aggregate financing, money supply data by July 15

Wednesday, July 10:

• China Inflation Data for June 09:30
• CCTD’s weekly online briefing on Chinese coal, 15:00
• Consultation period ends on China’s new draft carbon trading rules

Thursday, July 11:

Friday, July 12:

• China’s first batch of trade data for June, including imports of steel, iron ore and copper; exports of steel, aluminum and rare earths; imports of oil, gas and coal; imports and exports of petroleum products; imports of soybeans, edible oils, rubber, meat and offal ~11:00
• Weekly iron ore stocks at China port
• Weekly commodity inventory on the Shanghai Stock Exchange, ~15:30
• China Monthly Crop Supply and Demand Report

—With assistance from Dan Murtaugh.

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