China’s Reopening Boost to Commodities Comes With Caveats

(Bloomberg) — China’s reopening should help stabilize global commodities demand, according to the world’s top miner, but the prediction comes with caveats.

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BHP Group Ltd. reported a drop in first-half profit after the strict virus policies in its largest customer derailed demand for key commodities including iron ore, its biggest revenue earner. Beijing’s swift exit from Covid Zero that began in December is now breeding optimism that consumption will recover and offset slowing growth elsewhere in the world.

Raw materials from iron ore to copper and coking coal have rallied in anticipation of the return of Chinese buyers, although an extended Lunar New Year holiday and high stockpiles have dented hopes of an immediate lift to consumption.

“China has been buoyed by the green shoots we’ve seen since the start of this calendar year,” Chief Executive Officer Mike Henry told an earnings call. “So there’s a lot there that’s giving us confidence that we will see an acceleration in the Chinese domestic economy.”

However, the risk remains that China could fare worse than expected if the global downturn hits demand for its products. “If we see a sharper pullback in the US and Europe, that will have a bigger impact on Chinese exports,” he said.

Demand for iron ore from China’s vast steel industry is now expected to improve, BHP said in its earnings report, although it warned that the impact on profitability at steel mills, which affects the premium paid for higher grade ore, remains uncertain.

Beijing has also established a new state-owned company, China Mineral Resources Group, to consolidate purchases on behalf of its largest steelmakers. Henry said the development, designed to improve China’s leverage in the $160 billion trade, is “bringing an added dimension to the market” but downplayed concerns it would give buyers too much power.

In the medium term, BHP said Chinese consumption of iron ore will fall from current levels as steel output plateaus and more scrap is used. China’s steel production has been in decline for the past two years after the government moved to cut emissions and rein in its heavily indebted property sector, the biggest source of demand.

For copper, the miner’s next biggest earner, demand growth is expected to be modest, with improvements in China offsetting weakness in the developed world. More broadly, “the electrification mega-trend” is likely to be major tailwind for consumption of those metals like copper and nickel that are crucial to the transition away from fossil fuels, it said.

The Week’s Diary

Tuesday, Feb. 21

  • Nothing major scheduled

Wednesday, Feb. 22

  • China Photovoltaic Industry Forum in Beijing

  • CCTD’s weekly online briefing on China’s coal market, 15:00

Thursday, Feb. 23

  • EARNINGS: HKEX

Friday, Feb. 24

  • China weekly iron ore port stockpiles

  • Shanghai exchange weekly commodities inventory, ~15:30

On The Wire

Russian exports of discounted crude and fuel oil to China have jumped to record levels as the re-opening of the world’s biggest energy importer gathers pace after the dismantling of Covid Zero.

Something strange is happening in the world’s most polluting industry.

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©2023 Bloomberg L.P.

Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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