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Covid has bolstered China’s global dominance of steel

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Happy New Year from Hong Kong, where most things are still closed. The city, which was one of the first outside of mainland China to react to the initial outbreak, has now lived with the threat of the virus for almost a year.

The focus of today’s main piece tracks back to the mainland and looks at how Covid-19 has affected Beijing’s dominance of the global steel industry.

Meanwhile, Policy watch focuses on Erika Solomon’s and Guy Chazan’s dissection of how Germany’s relationship with China could be redrawn in the post-Merkel era.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at thomas.hale@ft.com

China’s pandemic response and steel demand

When news of a virus in Wuhan, China, first swept the world in early 2020, few would have imagined that the ensuing crisis would increase rather than stymie the country’s dominance of core industries.

One sector that lays bare that process particularly clearly is steel.

In the period to the end of November, China’s share of global production was 57.5 per cent, according to a MySteel analysis of data from the World Steel Association. That compares with 53.3 per cent in all of 2019.

Production in China was up over that period, compared with a year earlier, to almost 1bn tonnes, while total global production fell. In China, new reported cases of the virus slowed to a trickle in the second half of the year, while the pandemic continued to (and continues to) rage in other major economies.

China’s economic response to the pandemic — which involved issuance of special bonds designed to fund infrastructure projects, in an echo of its post-financial crisis stimulus strategy — ramped up the need for steel. Demand was also bolstered by a construction boom as house prices soared.

This has had major implications in the commodities market. While certain commodities, most notably crude oil, have collapsed in price on the back of the pandemic, the price of iron ore — a crucial ingredient in steelmaking — has repeatedly hit new highs.

Last month, it hit its most expensive level in seven years, boosted in part by demand from China’s buoyant industry.

Residential buildings in Shanghai. China’s steel exports are expected to increase thanks in part to slowing domestic property demand, especially in the housing sector
China’s steel exports are expected to increase thanks in part to slowing domestic property demand, especially in the housing sector © Qilai Shen/Bloomberg

Australia, which has become embroiled in an increasingly ill-tempered geopolitical spat with China, nonetheless shipped enormous quantities of iron ore over the past year. Its economy and big miners based in the country, along with other producers such as Brazil’s Vale, have benefited directly from that trade.

Steel production in China is still expected to remain high this year. S&P Global Platts estimates that in 2021, crude output will hit 1,068m tonnes. It also expects Chinese exports of finished steel products to increase.

This would be another example of an early recovery in China spilling over to other countries. As well as steel production, China ramped up its share of overall global trade last year, with exports rising more than 20 per cent year on year in November.

But Platts expects steel exports to increase thanks to both recovering demand abroad and slowing domestic property demand in China, especially in the housing sector, where China’s government has recently taken measures to control prices. It has already unveiled measures designed to constrain leverage across its biggest developers and over recent weeks announced new limits on banking lending, both to developers and via the mortgage market.

China’s recovery is expected to enter a phase driven by a full recovery in household consumption and away from its heavy reliance on industry. Official data has so far showed retail sales growth lagging behind industrial production, which in November exceeded the rate seen across most of 2019.

So while many of the conditions that bolstered the steel supply chain in 2020 may remain in place, there are also signs of China’s industrial strategy giving way to a different economic approach, though the bigger picture will depend on a global recovery as well as what happens in China.

And while steel output in China is expected to remain high, it may not necessarily surpass last year’s level. The country’s official news agency Xinhua reported in late December that Xiao Yaqing, minister of industry and information technology, said that China would “resolutely cut the output of crude steel and ensure it falls year on year in 2021”.

Rather than the short-term pressures of coronavirus, the announcement was linked to China’s longer-term plans to reduce carbon output. President Xi Jinping last year pledged to make the country carbon neutral by 2060. When the effects of the former have faded, the latter could have even greater — and more unpredictable — consequences for commodities trade.

Policy watch

Alan Beattie kicked off the week looking at how the EU’s new investment treaty with China presented Beijing with an opportunity to divide and rule. As Alan flagged, the treaty came at Berlin’s urging. And the closeness of the relationship between Beijing and Berlin is the focus of a long read by our Berlin bureau team, Erika Solomon and Guy Chazan.

Much of that closeness is built on trade links between the world’s two most renowned manufacturing powerhouses. For anyone after a sense of how much Chinese exports matter to Germany, here’s a chart from the piece:

Line chart of German goods exports to China as a % of total showing how the Chinese market has become increasingly important for Germany

As one of our readers noted, China is the third-largest export market for Germany after the US and France. Ever the pragmatist, Chancellor Angela Merkel has therefore taken a far more lenient stance on national security concerns than, say, the US or the UK.

But the article questions whether trade links will continues to override those concerns after Merkel steps down. As the writers point out, the current chancellor personifies old ideals of western rapprochement with China — the principle that ever-deepening economic ties with the west would encourage political change in Beijing, and a shift to liberalism and western values. Others, however, are far more sceptical, including her potential successor Friedrich Merz. Lawmakers from the Green party, which could well form part of any new governing coalition, have also been vocal about human rights abuses.

Elections are set for September. Watch this space.

Don’t miss

  • A lack of time to develop back-up stocks is one factor stymying the rollout of the Oxford/AstraZeneca vaccine in the UK, which approved the shot shortly after Christmas and is looking to administer 2m doses a week by the end of this month.
    Read more

  • Are we about to see a structural change in how often people fly for business? Michael Skapinker certainly thinks so. He argues that it’s not just that post-virus corporate cost-cutting will keep many travellers at home. It’s also that the environmental pressure against flying grew rather than shrank during last year’s lockdowns.
    Read more

  • Saudi Arabia has agreed to reopen its land, air and sea borders with Qatar in a move to end a dispute lasting more than three years that triggered an unprecedented crisis in the oil-rich Gulf and pitted US allies against each other.
    Read more

Tokyo talk

  • In 2021, the Regional Comprehensive Economic Partnership may help accelerate the post-pandemic shift of the world’s economic centre of gravity towards China and Asia. 
    Read more

  • Tesla will continue buying batteries from longtime Japanese supplier Panasonic until at least 2022, despite plans to produce its own cheaper alternative in-house. 
    Read more



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Emerging Markets

China lands spacecraft on Mars

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China has landed a spacecraft containing a rover on Mars, according to state media, in a further sign of its bold ambitions in the sphere.

The rover was part of the Tianwen-1 unmanned mission launched in July last year. Tianwen means “questions to heaven” and was named after a poem by Chinese poet Qu Yuan.

The mission, which was described by Chinese media as a “new major milestone” and the “first step in China’s planetary exploration of the solar system”, was intended to match the US by successfully landing on the red planet.

The Global Times reported that the lander and the rover from the Tianwen-1 probe reached a plain on Mars called Utopia Planitia on early Saturday morning local time, citing information from the China National Space Administration.

The Tianwen-1 probe’s lander and rover separated with the orbiter at about 4am, after which it had a three hour flight before entering Mars’ atmosphere, according to the newspaper.

The spacecraft then “spent around nine minutes decelerating, hovering for obstacle avoidance and cushioning, before its soft landing”. The rover is named Zhurong after a Chinese god of fire, and is 1.85m and weighs 240kg. It is expected to transverse the planet for about 92 days.

The probe was launched into space on July 23 by the Long March 5 rocket from the Wenchang launch pad in Hainan province, in the south of the country.

The achievement of the Mars landing is part of a wider expansion of China’s space programme. The country’s engineers launched the first part of its permanent space station into the Earth’s orbit late last month.

In 2018, China for the first time launched more vessels into orbit than any other nation.

The US views China’s efforts in space in strategic terms. “Beijing is working to match or exceed US capabilities in space to gain the military, economic and prestige benefits that Washington has accrued from space leadership,” according to the annual threat assessment published by the office of the US director of national intelligence.



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Iron ore sinks from record high on concerns over China crackdown

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The scorching rally that propelled the price of steel-making commodity iron ore to a record high came to a shuddering halt on Friday on concerns China will crack down on speculative activity.

The main iron ore futures contract in Singapore fell as much as 14 per cent to $190 a tonne before recovering to $209, while there were also big drops in China where the most active contract on the Dalian Commodity Exchange slumped almost 8 per cent.

The sell-off came as the local government in Tangshan, China’s main steel-making city, said it would examine illegal behaviour and suspend production at mills found to be manipulating market prices by spreading rumours and hoarding material, according to reports from Reuters and Bloomberg.

“China’s central government seems to be very concerned about this major input for its steel-intensive economy,” said Tom Price, head of commodities strategy at Liberum. “I think what the pullback reflects is the government trying to rein in prices.”

Line chart of $ per tonne showing Iron ore prices have fallen after a strong rally

Authorities in China have sought to cool hot commodity markets, with Premier Li Keqiang calling this week for stable prices. Iron was trading at $90 a tonne a year ago and hit a record high of $230 this week. Tangshan, which accounts for 14 per cent of China’s steel output, has introduced production curbs as part of a crackdown on pollution.

However, these measures have been slow to take effect as mills in the rest of the country have rushed to crank up output to take advantage of reduced capacity in Tangshan and cash in on record domestic steel prices. A decision to remove the export tax rebate for some steel products on June 1 has also led to other mills increasing production.

As a result, China’s steel production hit a record level in March, with output up 19 per cent year on year to 94m tonnes, according to financial group ANZ. The firm said production was even higher in April, with exports up 20 per cent year on year. That in turn boosted iron ore, which climbed 35 per cent over the past month.

“What the Chinese government is trying to do is incrementally contain the steel market, mindful of the fact they have spent a fortune resurrecting their economy over the past 12 months and they don’t want to kill the recovery,” said Price. “The measures are quite clever.”

Iron ore has led a broad advance in commodity markets over the past year, fanning talk that another “supercycle” — a long period of high prices — has arrived.

That has been a boon for big iron producers such as Anglo-Australian company BHP and its Brazilian rival Vale, which require a price of just $50 a tonne to break even.

However, most analysts think the iron ore market will remain tight and prices elevated for the rest of the year. That view is based on rising steel demand outside China as big economies accelerate and while important producers in Australia are operating at full capacity.

“While the price has been thumped in the past couple of days, demand remains robust, helped by the fantastic margins the steel industry is enjoying,” said Andrew Glass, Singapore-based founder of Avatar Commodities.

Elsewhere, copper was set for its first weekly loss in more than a month amid worries that a tightening of credit in China could hit demand for the metal, used in everything from household goods to electric vehicles. Copper, which started the week at $10,412 a tonne, was trading at $10,245 on Friday.



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Biden says ‘strong reason’ to believe pipeline hackers are in Russia

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Joe Biden said the US government has “strong reason” to believe the hackers behind a massive cyber attack that shut the Colonial petroleum pipeline were based in Russia, as he urged Americans to not panic over temporary fuel shortages.

“We do not believe the Russian government was involved in this attack. But we do have strong reason to believe that the criminals who did the attack are living in Russia. That is where it came from,” the US president said in a speech on Thursday afternoon at the White House.

“We have been in direct communication with Moscow about the imperative for responsible countries to take decisive action against these ransomware networks,” he added, noting he hoped to discuss the issue with Russia’s president Vladimir Putin.

The 5,500-mile pipeline system has capacity for 2.5m barrels a day of liquid fuels such as petrol diesel and jet fuel, which it carries from Gulf Coast refineries to major hubs in the north-east. The FBI has indicated that the shutdown was caused by a ransomware attack by hacking group DarkSide.

Cyber experts claim Russia tacitly allows ransomware gangs to operate in the country and will not prosecute them. In return, those criminals do not attack Russian companies and can be called upon to share their access to victims’ systems, experts say.

Last month, the US Treasury accused one of Russia’s intelligence services, the FSB, of “cultivating and co-opting” the notorious ransomware group Evil Corp, which has been sanctioned.

The Colonial pipeline — responsible for carrying almost half of the motor fuel used on the US east coast — began the process of fully reopening on Wednesday evening, five days after it was hit by a cyber attack that triggered a spate of panic-buying by motorists across the US south-east.

Biden said the US government expected a “region by region return to normalcy beginning this weekend and continuing into next week”. He urged Americans to avoid panic-buying petrol, and said he had called on state governors and local authorities to keep a lookout for any illegal price gouging by businesses.

“Don’t panic, number one. I know seeing lines at the pumps or gas stations with no gas can be extremely stressful, but this is a temporary situation,” Biden said. “Do not get more gas than you need in the next few days.”

Shortages at filling stations triggered by panic-buying continued on Thursday, with 70 per cent of stations in North Carolina running dry and about half in Virginia, Georgia and South Carolina, according to GasBuddy, a data provider.

The situation in some major urban hubs was beginning to improve, however. The amount of stations without fuel in Atlanta fell from a peak of 73 per cent overnight to 68 per cent by Thursday afternoon.

Colonial on Thursday morning said it had made “substantial progress” in bringing its operations back online and that all of its markets would begin receiving product by the afternoon.

Prices at the pump have continued to rise. National average petrol prices rose to $3.03 on Thursday, according to the AAA, an automobile association. They crossed the $3 a gallon threshold on Wednesday for the first time since 2014.

Gasoline futures retreated on the news of Colonial’s reopening, as traders anticipated supplies returning to normal. Contracts for June delivery slipped 7 cents to $2.08, their lowest level since April in Thursday afternoon trading.



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