Why China Impacts Global Commodity Markets
Analyzing The Aluminum Industry's Key Dynamics (Part 7 of 10)
China’s impact on global commodity markets
In the last part of this series, we saw that China accounts for almost half of global aluminum consumption. The same trend is also visible in the steel industry. China accounts for almost half of global steel consumption.
The SPDR S&P Metals and Mining ETF (XME) invests in the steel and aluminum industries. Currently, Alcoa (AA), Century Aluminum (CENX), US Steel Corp. (X), and Nucor (NUE) are among its top ten holdings.
However, China’s role in global markets differs across these two commodities. First, we’ll look at China’s role in global steel markets.
China is the biggest steel exporter
China is the biggest steel exporter in the world. The biggest risk that steel companies in the US and other parts of the world face is cheap Chinese steel entering their borders. Let’s discuss the factors that drive Chinese steel exports.
Lower capacity utilization – Due to the current slowdown, capacity utilization rates decreased in China. However, China still continues to add new capacity. This can be seen in the above chart. Chinese steel companies have an incentive to run the plants at higher capacities. This reduces their unit production costs. The cheap steel finds its way into the international markets.
Lower cost of Chinese steel – One of the key factors for higher steel exports from China has been the difference between steel prices in China and other countries. Analysts attribute this price differential to the Chinese government’s support. The government provides cheaper credit and export subsidies.
In contrast, China’s aluminum exports only account for a fraction of global trade. We’ll discuss this more in the next part of this series.
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