By Ulf Bergman
The global economic recovery is gaining momentum, with the US reporting that its economy expanded by 6.4 per cent on an annualized basis in the first quarter. While the US growth did not match the record-breaking pace of expansion in China, the rise allowed the real GDP to recuperate 91 per cent of the pandemic-induced drop. A strong recovery in consumer spending contributed to the robust gains, as jobless rates edged down and two sets of federal stimulus packages sent growth in personal consumption to the highest levels since the 1960s. The second quarter is likely to remain strong as the record-level federal spending is poised to flow into the economy, with some economists expecting growth to reach ten per cent. For the year as a whole, economists are expecting the economy to expand close to 7%, which would be the strongest calendar-year growth since 1984.
The strong rebound for the global economy, especially in China and the US, has seen the demand for many industrial commodities surging and driving prices higher. Copper, often seen as a leading indicator for the health of the global economy, has extended its gains to trade above 10,000 dollars per tonne for the first time since the early parts of 2011. Hardly surprising, the steel markets have followed suit and the Shanghai steel futures have surged past yet another milestone to trade above 5,300 yuan a tonne.
Steel Rebar - Shanghai Futures Exchange (CNY/tonne)
Some of the price appreciation can be attributed to the environmental restrictions imposed by the authorities in the main steel-producing hub of Tangshan to control pollution levels, which have curtailed output growth despite the rising demand. Despite the restrictions, Chinese crude steel output in March increased by 19 per cent compared to a year ago to a near-record, on high-profit margins, and exports also climbed to a four-year high, suggesting a robust global demand. The stimulus-driven increase in construction has been boosting demand for the metal and additional fiscal measures, primarily in the US and Europe, are likely to keep supporting the appetite for steel over the coming industrial peak season.
Steel production has become an early target in Bejing’s push to lower emissions and reach net-zero carbon by 2060. The industry, which produces more than half of the world’s steel, accounts for around 15 per cent of China’s greenhouse gas emissions, making it one of the largest industrial contributors to the country’s carbon footprint. In addition to nationwide inspections of the steel industry to make sure that capacity cuts ordered over the past five years have been enforced, the authorities will make exporting steel more expensive by removing tax rebates on exports from May. Beijing is also easing some input costs by cutting import tariffs on steelmaking materials, such as semi-finished products and scrap, which could weigh somewhat on the country’s demand for iron ore but increase imports of recycled steel. The change in taxation could to some extent alter the steel-related global trade-flows during the emerging boom and force international buyers to find alternatives to Chinese steel. Hence, demand for iron ore may increase in the other steel-producing countries, such as India and Japan.
The diplomatic tensions between China and Australia have already altered some of the trade flows for the other ingredient in steel production, coking coal. North American miners have benefited from the unofficial ban on Australian coal imports, with the longer voyages contributing to the tonne-mile demand in the dry bulk sector. China's share of the sales from North American producers has increased compared with Europe, Japan, Brazil and India. Many North American coal miners have increased output during the first quarter of the year and expect to increase their shipments to China during the year. Canadian coal has the benefit of a shorter voyage from the loading ports in British Columbia, but the Phase One trade deal could see a preference for US Coal despite the longer distance. Recent data from The Peterson Institute for International Economics show that Chinese purchases of US goods are still below the volumes committed to in last year’s agreement, which the new US administration expects China to live up.