The Artificial Shortage of Copper

China's copper smelters, who are facing a lack of semi-processed material, are expecting an infusion of supply from South America, indicating that the supply crunch that has been fueling the metal's advance may be easing. 

Domestic Consumer Demand

According to IHS Markit lead shipping analyst Daejin Lee, there will be a huge number of ships coming at Chinese ports from Chile and Peru, the country's key suppliers, starting next month as bottlenecks clear.

 According to him, the amount of concentrate projected to enter the Asian nation could increase by over 60% from February's figure.“Margins are compressed” as raw material prices rise, according to Li, owner of Huizhou Baizhan Glass Co. Ltd. in Guangdong, China, which generates approximately $30 million in yearly revenue. Because the global economic recovery is still unequal, “the future is uncertain,” he adds, “there isn't much push to expand capacity.”

According to official statistics, Chinese manufacturing investment from January to April was 0.4 percent lower than the same period in 2019 due to a combination of higher input prices, uncertainty about export prospects, and a weak recovery in domestic consumer demand (comparing to 2019 strips out the distortion of last year's pandemic data). 

Because of China's massive manufacturing sector, this poses a threat to both the country's growth — which is currently expected to reach 8.5 percent in 2021, according to a Bloomberg tally of economists' predictions — and the global economy, which is grappling with supply shortages and rising prices.

Decreasing Profits

Weaker-than-expected investment might have a "significant" impact on GDP growth this year, according to Li-gang Liu, Citigroup Inc.'s China analyst. Lower investment might stymie imports of capital goods and equipment from established nations such as Japan and Germany, he said, “dragging their economic recovery and resurgence as well.”

One of the companies feeling the pinch is Anhui HERO Electronic Sci & Tec Co. Ltd. The company, which is based in the eastern province of Anhui, manufactures capacitors for use in electronic circuits, with a focus on the home market.

Orders are up as much as 30% year over year, but earnings are down 50% due to rising material costs that are difficult to pass on to clients, according to Jing Yuan, the founder.

According to him, the company is under "great liquidity strain" because it needs to pay half a month ahead of time to acquire copper and other metals, which is traditionally paid for months after receiving. “The government must solve the commodities issue,” he added.

China's industry is absorbing major cost pressures from rising commodity prices, reducing the global inflationary impact. Is it going to last? According to our estimate of gross margins, it could be for a bit longer: downstream industries, which are suffering the most from the cost constraint, nevertheless have a tiny cushion.

Because some manufacturers are unable to utilize their existing facilities due to supply shortages, growth would be futile. Nio Inc., a Chinese electric car manufacturer, halted production at one of its factories last month owing to a microprocessor shortage.

Modern Casting Ltd., a Guangdong-based iron and steel manufacturer, wrote a notice to clients earlier this month stating that it would be unable to fulfill current contracts due to rising raw material costs. 

The note was confirmed by a member of staff who answered the phone at the company's headquarters, but no other details were provided.

Transitional Growth

In addition to rising input costs, Chinese businesses must navigate a rocky path toward domestic consumer spending to maintain the country's post-pandemic recovery. 

Exports, which were China's strong suit last year, may decrease if vaccine roll-outs drive wealthy countries' customers to shift spending back to services. Meanwhile, China's consumer spending growth rate has yet to fully rebound.

According to a regular poll of more than 500 Chinese companies by Standard Chartered Plc, investment sentiment among Chinese small and medium-sized organizations is lower than it was even in 2018-19 when uncertainty about the US-China trade war slowed expansion plans.

“Demand is still mostly driven by exports, so local enterprises are aware that this is not sustainable,” said Lan Shen, a China economist at Standard Chartered. While some export-oriented sectors have been pushed to their limits, due to weak domestic demand, there is still a lot of room for manufacturers targeting Chinese consumers. 

Even in the booming electric vehicle market, most companies have already expanded their capacity and will now focus on incremental improvements. “The majority of the investment has already been made,” said JSC Automotive Consulting's Jochen Siebert.

Long Term Investment

Last year, China urged state-owned firms to expand, with their investment growth of 5.3 percent in 2020 compared to the previous year significantly outstripping private investment growth of 1 percent. 

However, for a long-term increase in investment, the market, not the government, must be confident. Overall capacity utilization among Chinese manufacturers decreased to 77.6% in the first quarter, down from 78.4% the previous three months, with the automobile sector being the hardest hit by overcapacity after three years of decreasing sales volumes.

According to Carsten Holz, a Chinese investment expert at the Hong Kong University of Science and Technology, privately owned enterprises accounted for 87 percent of industrial investment in 2015, the most recent year for which data is available. Input expenses are more important to them.

“There is a pandemic, as well as uncertainty about future trade given the new US government, neither of which is favorable to long-term investment,” Holz added.
Mixed policies:

For export-oriented manufacturers, transportation bottlenecks are often a problem. Due to port delays, Gordon Gao, who sells gardening supplies from China, has had to reject 80 percent of orders this year. 

When a client eventually obtained a container, an order placed before mid-February could only be sent three months later. Beijing has attempted to improve conditions for private businesses by ordering a crackdown on commodity speculation and easing access to bank credit.

Despite this, the government continues to phase off fiscal and monetary stimulus measures enacted in the aftermath of the outbreak last year. It set an unambitious growth target of "over 6%" for this year, and the Communist Party's Politburo suggested last month that steps to curb home prices and debt growth would be prioritized.

According to Adam Wolfe, an economist at London-based Absolute Strategy Research, “the policy approach has turned away from promoting growth and back toward de-risking the banking sector.” “Economic growth risks appear to be skewed to the downside, particularly in capital-intensive, construction-related sectors.”

For firms like Li, a longer period of domestic growth and price control will be required before capacity expansion can be considered. While his 200- person company hired additional permanent employees before the pandemic, he'd prefer to pass the investment risks to others for the time being. He said, "I wouldn't do that now; I'd rather hire some temporary workers and outsource the rest".

The Chinese were ahead of the curve in declaring scrap to be a "recyclable resource," but when the rest of the globe follows suit, there will undoubtedly be more rivalry for the material. Although China has reopened its doors, it is unclear whether scrap imports will ever fully recover.

Written By - Riduvarshini
Edited By - Akash Verma

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