The metal boom puts Beijing in a labyrinth

The metal boom puts Beijing in a labyrinth
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Clashes with China’s push to cut excess capacity and cut emissions

The commodity boom has put Beijing in a bind. It is trying to forcibly limit a fierce rise in key industrial ingredients, which is hurting derivatives manufacturers. But China’s push to cut excess capacity and cut emissions has caused companies to cut production, while real estate and exports continue to drive demand.

For the tradersThis year has been a roller coaster ride. The most traded iron contract for September delivery on the Dalian Commodity Exchange rose more than 50% to a record high on May 12. Prime Minister Li Keqiang warned against “unreasonable” increases and prices fell 20%. On Sunday, the main metal producers were summoned to a talk. Then there was a general market crash.

It will be difficult to stay calm. In addition to the global rebound in products such as oil, domestic demand, driven by real estate construction and exports, is driving the consumption of iron, steel, coal and copper. This has naturally attracted speculators and generated volatility. The real estate issue is especially sensitive. Investment in housing rose 22% in January-April compared to the previous year; sales soared 48%. In part, because the central bank, concerned about macro weakness, has been forced to maintain flexible liquidity conditions. That, in turn, has sabotaged his campaign to flatten real estate values. The supply side is another problem. The government wants carbon neutrality by 2060, and is trying to reduce excess capacity. But this has reduced production in mining regions.

Market forces, both inside and outside of China, are plotting against the authorities. If taming real estate was easy, Beijing would have done it by now. They can hardly refuse export orders. But increasing production to deflate pressure will jeopardize climate goals. Something will have to give.