Slower H2 demand across most commodities in China

Demand across most commodities in China is expected to slow down in the second half of 2021, according to Wood Mackenzie’s new monthly China Economic Focus report.

China registered another strong quarter in Q2 2021 with year-on-year GDP growth of 7.9%. Adjusting for the base effect, the two-year CAGR in Q2 was 5.5%, accelerating from 5% in Q1 on a two-year CAGR basis. However, the central bank cutting the reserve requirement ratio (RRR) by 0.5 percentage points indicates the government’s concern on the economy in the short term.

Wood Mackenzie senior economist Yanting Zhou said: “China’s economy is expected to slow down in H2 2021. Slower export growth, rising commodity prices, lacklustre infrastructure investment and expiring subsidies will all drag down the country’s GDP growth. As a result, we should see a deceleration of commodities demand in China.

“We expect slowing industrial production growth accompanied by decelerating cargo transportation in the second half of 2021. This will lead to slower demand growth for power, as well as fuels such as coal, natural gas and diesel. However, this will be partially offset by increasing power demand for cooling due to the exceptionally hot weather in southern China this summer.”

The industrial sector accounts for 65%, 73%, 53% and 29% of China’s end-use demand for electricity, coal, gas and oil, respectively.

Meanwhile, slowing industrial production growth, and lacklustre investment in manufacturing and infrastructure are also expected to have a negative impact on demand for metals. The slowdown in transportation infrastructure has been significant this year with the two-year CAGR of railway investment in H1 slowing to 1.5% compared to 14% year-on-year growth in H1 2019. As a result, steel demand is likely to take a greater hit compared to other metals.

Zhou said: “Copper demand, however, should remain robust in the second half of the year due to subsidies for offshore wind projects remaining in 2021.”

Zhou clarified that slower Chinese demand does not necessarily mean lower prices. “Coal and steel prices in China are determined by the local market. Despite slower demand expected in H2 2021, supply constraints are likely to support high prices,” Zhou said.

The Ministry of Industry and Information Technology aims to keep full-year steel production flat with 2020, which indicates a significant production cut in the second half after nearly 12% growth in crude steel production in H1.

Other commodities, including crude oil and most base metals, follow global pricing and slower demand in China will be offset by recovery in the rest of the world. Taking crude oil as an example, global demand will grow by 6.2% year-on-year in H2 and turn the market balance into deficit. This will help to support prices in the second half.