China's slowdown in economy takes toll on global prices of commodities

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Sep 2008

Indian iron ore exporters yesterday warned that demand from steel mills in China had fallen sharply over the past month and that Chinese buyers were defaulting on contracts with suppliers. With coal reportedly piling up in China's eastern ports, the news of steel defaults will fuel concerns about the likely impact on global commodity prices of a slowing Chinese economy. Analysts say smaller Chinese steel mills are losing money on their output because of weak steel demand and the hefty prices they paid for ore and coal ahead of the Beijing Olympics in August.
China's crude steel output fell 5 per cent month-on-month in August to 43m tonnes, although at least some of the fall was because of temporary industrial disruption caused by antipollution and security measures imposed for the games.
Rahul Baldota, president of the Federation of Indian Mineral Industries, said that Chinese buyers were trying to knock between $25 and $30 off the price of a tonne of ore on contracts that had already been agreed, or were simply backing out of agreements.
Three months ago high grade ore sold for about $140 a tonne.
"They have signed up at certain prices and now the market has taken a downward turn they are saying they can't buy from us. Either we are forced to sell at lower prices or look for another buyer," Mr Baldota said.
"Steel production [in China] has been going down over the past month."
China's status as a pivotal source of demand for many commodities means even a mild slowing of its economy - which has been growing at double-digit rates for years - has serious implications for global prices.
Michael Lewis, head of commodities research at Deutsche Bank, said that China was expected to account for more than 40 per cent of global demand growth for nickel, oil, copper, steel, iron ore and aluminium during 2009.
"Any downturn in Chinese growth, industrial production and fixed asset investment growth will therefore have important implications for underlying commodity demand," Mr Lewis said.
Xu Zhongbo, head of Beijing Metal Consulting, said that steel production was falling in response to weak exports of products that use the metal and declining orders from domestic sectors such as the previously apparently unstoppable motor industry.
Meanwhile, car sales could be further hit if would-be buyers take fright at plans by Beijing to launch a six-month trial of restrictions on car use, under which most vehicles would be banned from the roads every fifth day.
However, Mr Xu said that he expected steel demand to pick up as official concerns about inflation receded and the need to support economic growth once again became the main policy -priority.
"The decrease in demand . . . is mainly because the government's focus this year was killing inflation and you can say that they are meeting that target," Mr Xu said. "After six months everything will be OK."

Source: Financial Times