China Reopening Changing Market Dynamics Impacting Importers

By K Raveendran

With China slowly reopening after it abandoned the zero-Covid policy, global markets are bracing up for an industrial inflation, denoting higher industrial material prices. Already signs of importers of Chinese goods and materials having to dish out more for their requirements are visible, according to analysts.

China’s zero-Covid policy has been central to the global inflation story. Now with over a week after the Lunar new year, the big question is how soon can the Chinese economy return to pre-Covid levels. The prospects of an early return have already eased global recession fears, giving central banks a lot more freedom with interest rates.

According to Rystad analysts, no extreme price movements in industrial materials have occurred yet, but prices have rather increased steadily over the month of January. They expect that the country’s widescale reopening will not result in a return to the highs of 2021 and 2022 but will instead stabilise at a higher level than pre-pandemic.

Short-term economic indicators such as the Purchasing Managers Index (PMI) for manufacturing and credit growth during February will help paint a clearer picture of China’s economic strength as it reopens to the world and how it will impact global markets. On January 31, the manufacturing PMI moved above 50 for the first time since September 2022, signalling a return to growth in the domestic manufacturing sector. The sector is expected to continue expanding in the months to come, although the pace remains uncertain.

All signals suggest global inflation growth has peaked, which is welcome news for consumers and industry alike. This trend has been observed further upstream in several Producer Price Indexes since May 2022, and now this is transferring further downstream. The spread between prices paid and received by manufacturers in the US has converged after a two-year divergence. Upstream cost reductions are also reflected in the most recent producer price data from Australia.

On the flip side is uncertainty in Latin American countries such as Chile and Peru, which can lead to considerable price movements over the short term. In the first two weeks in January alone, market prices for copper increased 15 percent, approaching the levels seen immediately following Russia’s invasion of Ukraine last year. The copper supply picture is currently improving in Chile too, with year-on-year production rising slightly from December 2022 to January 2023.

Industrial sentiment in the eurozone is also looking up and is now way above the average analyst forecast.   A mild December in Europe, together with strong wind power generation particularly in Germany, has improved the energy situation considerably. European gas prices are currently down 83 percent from the peak in 2022, helping to ease economic worries, with the Flash Eurozone Manufacturing PMI reading for January 2023 reaching a seven-month high.

The energy crisis in Europe triggered by the Ukraine war has left the continent short of hydrocarbon supplies and increasingly reliant on liquefied natural gas imports. Norway, the largest oil and gas producer in the region, has stepped up with a record-breaking sanctioning boom on the Norwegian Continental Shelf (NCS) that has seen a staggering 35 projects greenlighted in the last two and a half years – most at the tail-end of last year. According to Rystad Energy research, Norway will see development spending skyrocket in the short-term as the buildout of the project portfolio is estimated to launch a whopping $42.7 billion of greenfield investments.

The energy scene has taken a big shift, with the global energy system becoming more dispersed and divided. It has been observed that in the wake of sanctions against Russian oil, western nations which dominated oil trade have pulled back and their place has been taken by new players, notably based out of Hong Kong and Dubai. There is a flourishing grey market operating on the energy front.

This explains to a large extent how the Russian oil exports have exceeded their previous levels despite the sanctions. While India and China have been major buyers of the embargoed Russian oil, market intelligence is reporting the discovery of a lot of cargoes destined for unknown destinations. The net result has been the failure of the western sanctions, while petroleum prices have remained in more than realistic zones. (IPA Service)

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