China eases energy controls, but glimmer of hope in Chinese industrial metal stocks fades as Shanghai goes into lockdown

China aims to expand renewable power, maintain oil production levels, and increase natural gas production while balancing energy security and achieving its climate change goals.

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China ease energy control
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  • China’s city-wide lockdown of Shanghai caused the Chinese stock markets to fall by 2%
  • Premier Li Keqiang called on the country to develop its innovative capabilities
  • China eases annual energy restrictions and is expected to see an upward trend in industrial metals and coal production

China is the world’s top steel producer and consumer, with a market share of about 50%. Steel is a highly versatile alloy that may be customised to meet various criteria. Steel is utilised in the construction, transportation, industrial, automobile, infrastructure, and utility industries, making it one of the world’s most adaptable materials. 

The top five steel-producing countries in 2016 were China, Japan, India, the United States, and Russia. China was the leader with 831 million metric tons of crude steel produced in 2017. The United States and Germany are the top steel importers because of their high consumer demand rates, and China and Japan are the top exporters.

Given its commanding market share and the large amounts of steel utilised in several industries, the slowing down of the Chinese economy would have a significant impact on the worldwide steel industry. Qiu Yuecheng, director of coal, steel and mineral coke research at Everbright Futures in Shanghai, said in a recent interview that ‘after easing annual intensity restrictions, it’s expected to see an upward trend of production for industrial metals and coal’.

In the United States, steel producers are raising their prices because of rising input costs and a weakening rupee, which is good news for users of this metal. Steel companies should see increased earnings and higher share prices due to increasing production and price increases. However, if steel demand decreases, China will export excess steel and lower global prices. If production falls, the need for raw materials will decline and prices. As a result, China has the most significant impact on worldwide steel prices.

How lockdowns have impacted China’s trading hub

Shanghai has prepared a five-year strategy to boost its position as a global trade centre and reaffirm its commitment to making it even more attractive to foreign firms. By 2025, Shanghai aims to become an investment gateway in the Asia Pacific region, an international city with the most up-to-date consumer goods and retail formats, a supply chain management centre for the Asia Pacific area, and a pioneer in new trade mechanisms and pilot trade zones.

According to the Saxo Daily Digest, China’s city-wide lockdown of Shanghai, a significant financial and manufacturing centre, caused the Chinese stock markets to fall by 2% in early trading. Global oil prices fell by more than $4.50 per barrel, and concerns that the move would result in lower demand for oil caused Brent crude to lose over $4.50 per barrel.

In planning for the future, China aims to expand renewable power, maintain oil production levels, and increase natural gas production while balancing energy security and achieving its climate change goals. Avery Chen from S&P Global recently reported on the Chinese People’s Political Consultative Conference in Beijing on March 10, 2022 saying that China recently relaxed its energy intensity standards to maintain economic stability and avoid a raw material shortage, even though demand concerns continue. 

China’s choice not to impose an annual energy intensity target, or energy use per unit of GDP, should also remove the shackles from its industrial metals producers, such as steel, aluminium, and zinc, as it works to grow its economy. According to Qiu, it’s hard to rely entirely on infrastructure to drive demand, as the scale of the troubled real estate market is far greater than that of the infrastructure industry. Steel demand comes from various sectors, with the property market comprising nearly 40% of overall consumption and infrastructure making up about 15% to 20%.

An analysis of the Chinese economy recently published on investopedia.com states that more than 75% of the population in China is still subjected to dangerous air pollution and carbon dioxide emissions, which have increased in recent years. Despite Chinese efforts to reduce steel output to combat pollution, some factories are increasing capacity, and China’s steel production is on the rise. This increase in manufacturing has kept demand for high-grade iron ore, a raw material for steel and a factor in steel pricing, while also keeping prices up.

China is also the world’s biggest greenhouse gases emitter and aims to achieve carbon neutrality by 2060. According to Reuters, China will keep annual crude oil output at 200 million tonnes, or 4 million barrels per day, and increase annual natural gas production to more than 230 billion cubic metres by 2025 from 205 billion cubic metres in 2021. China now seeks to establish coalbed methane production bases in Inner Mongolia, Xinjiang, and Shanxi provinces and expand the exploration and development of fracking resources such as shale oil and gas.

By 2025, China aims to have a gas storage capacity of 55-60 billion cubic meters or 13 per cent of total yearly consumption. It also plans to finish the southern extension of the existing China-Russia gas pipeline. China also aims to have non-fossil fuels account for around a fifth of total energy consumption, up 16% in 2020. It aims to limit coal usage in heavy industries, including steel, chemical, and cement construction. China will also build several hydrogen energy projects, focusing on methods for improving hydrogen storage, transportation, application, and fuel cells.

Beijing will advocate using ethanol, biodiesel, and bio-jet fuel, as long as it does not jeopardise food security. After plummeting corn stockpiles and a lack of biofuel production capability, China halted a nationwide plan to blend gasoline with ten per cent ethanol by 2020.

On Saturday, Premier Li Keqiang called on the country to develop its innovative capabilities in a speech at China’s annual National People’s Congress. In support of this goal, he announced new incentives for innovation and ‘faster breakthroughs’ in core technologies. According to Premier Li, the government will raise the tax rebate for small and medium-sized science and technology firms from 75 to 100 per cent and provide tax incentives for basic research to encourage innovation.

Investors have anticipated increased demand and imports for industrial metals due to China’s infrastructure stimulus and monetary easing. However, experts are concerned that such optimism is excessive as COVID-19 sweeps across the country, the real estate sector suffers from a liquidity crisis, and the Russia-Ukraine conflict raises raw materials costs.

China’s industrial profit growth accelerated slightly to +5% YoY, and upstream industries like coal mining, oil and gas extraction and non-ferrous metal mining had the most robust earnings growth and profit margins. Steelmakers’ shares were green on March 28, with expectations of future price hikes. Ratnamani Metals, Tata Steel, and JSW Steel traded 0.2-1 per cent higher on the National Stock Exchange. If steel spot prices continue to rise, as they have over the past few months, then Tata Steel and Jindal Steel Power could profit.

The new lockdowns announced in Shanghai have caused WTI oil futures to fall more than 3% to less than $110. Oil prices fell 8% on Monday following reports about Shanghai’s lockdown, which sparked concerns about declining demand for oil from China, the world’s largest oil consumer. The drop in oil price has caused concern among buyers, with West Texas Intermediate crude oil currently trading at under $106 per barrel, down around 10% from Friday’s close.

Investors who want to take advantage of this development may consider investing in the Chinese material sector by buying the Global X MSCI China Materials ETF, an exchange-traded fund (ETF) that tracks the MSCI China Materials index.

Investors need to remember that China’s zero-tolerance policy against the COVID-19 virus impacts growth, despite government pledges of solid support for the economy and markets earlier this month. Lockdowns are adding risks to the Chinese equities market, with investors already dealing with regulatory hurdles such as a possible delisting of domestic companies from American exchanges and the ramifications of Russia’s war on Ukraine. Some investors are also concerned that the virus could spread more widely, causing a slowdown in global economic growth.

However, some analysts are optimistic that the lockdown will help contain the virus and that China’s economy will rebound once it is lifted. They point to the fact that the Chinese government has responded quickly to the outbreak and has taken several measures to support the economy. Whatever the outcome, it is clear that the lockdown in Shanghai significantly impacts the Chinese industrial metal stocks.

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