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The energy crisis in China has clear winners, with prices for coal and liquefied natural gas (LNG) hitting record highs, but the outlook for other commodities is more mixed and depends on how the crisis unfolds.
Chinese officials have been scrambling in recent days to make sure the world’s second-largest economy has enough fuel for the winter, essentially calling on traders and utilities to do whatever it takes.
It is not surprising that benchmark Australian thermal coal prices at the Port of Newcastle, as assessed by the commodity price reporting agency Argus, have reached an all-time high of $ 203.65 per ton in the week of October 1, up 12.7% from the previous week.
LNG spot prices in Asia also hit a record high last week, reaching $ 32 per million British thermal units (mmBtu), as some cargoes are trading up to $ 36 per mmBtu.
These prices show some desperation as Chinese buyers attempt to secure cargo ahead of winter demand.
But it is also likely that the current rally will be temporary and will not last beyond winter, as the demand for fuel will decline as the cold weather eases and China will then likely be able to keep up. ” increase its national charcoal production, and even increase its natural charcoal production. gas production.
But the secondary impacts of the current energy crisis could be more lasting.
The raw materials affected will largely depend on how China chooses to ration electricity demand during the winter.
Based on current indications, primary metal producers will be urged to cut more than secondary users such as manufacturers.
If so, China will experience a drop in the production of metals such as steel, aluminum and refined copper.
But if consumers of these metals, such as manufacturing and construction, can continue to operate to maintain economic growth and employment, it will serve to raise prices as supply becomes limited.
This could benefit non-Chinese metal producers, especially those operating in countries where energy prices have not soared.
Australia will win?
A prime example could be aluminum smelters in Australia, where electricity prices have yet to rise as most coal producers have long-term supply contracts insulated from the current price spike. spot, and the growing share of renewable energy production is cheap.
Another boost for non-Chinese metal producers could come from lower exports if Beijing prioritizes domestic supplies.
China exported 490,000 tonnes of raw aluminum and products in August, according to customs data, up from 470,000 tonnes in July. However, in the first eight months of the year, aluminum exports fell 10.3%.
China also exported 5.05 million tonnes of steel products in August, up from 5.67 million in July, and well below the 2021 peak of 7.97 million in April.
If domestic steel prices recover due to electricity-related production brakes at factories, it would be logical to assume that steel exports will continue to decline.
However, if metal production in China declines despite the power cuts, it would be bearish for the raw materials used, such as iron ore, alumina and bauxite, as well as for base metal ores such as copper and nickel.
Iron ore has already foregone all of its gains in 2021, with the spot price for delivery in northern China ending at $ 118.05 a tonne on October 1, down nearly 50% from its record high of $ 235.55 reached on May 12.
In some ways, what happened to iron ore is likely to be repeated with thermal coal and LNG.
Iron ore fell from its coronavirus pandemic-induced lows of $ 79.60 per tonne in March last year to an all-time high amid strong Chinese demand and supply constraints in major exporters Australians and Brazilians.
But as soon as China started cutting steel production and the weather disruption ended in Australia and coronavirus-related reductions in Brazil eased, iron ore plunged.
At present, thermal coal and LNG are at record highs amid the same history of massive Chinese supply and demand constraints among major exporters, with coal producers from major Indonesian and Australian exporters having failed. no capacity to rapidly increase production, and LNG exporters in several countries are battling unplanned blackouts.
(The views expressed here are those of the author, columnist for Reuters.)
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