- The metals sector intersects some of the major themes that have been weighing on the global financial markets, with the more recent news of China’s thermal coal shortage propelling commodity prices higher and further exacerbating inflationary and supply chain fears.
- Tight supply of thermal coal is the main cause of China’s energy crunch. This is exacerbated by surging power consumption from export related industrial sectors.
- We expect power rationing to continue over the next few months as China enters the winter heating season. To alleviate the power shortage, China has increased coal supply, controlled coal prices, and allowed more market-based electricity tariffs.
- Prices of metals and processed metal products reached record high levels in China thanks to power rationing related production curbs. Profits are surging at Chinese metals & mining companies. Despite weakening steel demand, we expect prices and profit margins of steel products in China to be supported by lower steel production in 4Q21.
- We expect the ongoing energy crunch to increase China’s stagflation risk. China would likely implement targeted credit easing and fiscal measures to counter the downward pressure on growth.