It’s the end of winter in China’s industrial heartland. While the warmer weather will come as a relief to many after a particularly brutal cold season, it’s also a turning point for some key commodity markets, with implications that reach beyond the nation’s borders. Here are four charts showing how and why.
Steel: March 15 marks the scheduled end of steel capacity curbs that were put in place to help reduce pollution during the nation’s winter heating season, when smog’s at its worst. The cuts that began in November succeeded in helping improve air quality as output slumped and also propelled steel prices and mill profitability to the highest level in more than eight years.
While China’s top steel-making city has since ordered some smelters to implement further curbs through November, a wider recovery in blast-furnace production would represent a headwind for the market. Prices are already falling, dragged lower by inventories that have surged to an almost five-year high in spite of the winter curbs. With the added obstacle of US tariffs on exports, the outlook for steel looks challenging.
Natural gas: Winter’s end will also be a drag on liquefied natural gas, which more than doubled since October amid shortages, pipeline outages and supply bottlenecks.
The unregulated price of domestic LNG, which fuels everything from trucks to small factory boilers, skyrocketed in winter as shortages forced the government to shut domestic liquefaction plants in order to reserve gas for home heating.
China boosted imports in order to make up for the gap, helping boost global spot LNG prices to the highest level since 2014. As winter ends, those shortages have eased and domestic liquefaction plants have restarted, creating less need for imports.
One of northern China’s main terminals was loading as many as 400 trucks a day with imported LNG at the end of last year. That had dropped to only 200 trucks a day by late February. Domestic and global spot LNG prices are now dropping.
Coal: What should have been a bad winter for coal, as the nation relied more heavily on cleaner fuels such as gas, turned out far more benign as the government was forced to reverse restrictions to keep the population warm.
Prices touched the highest since 2012 in January as demand spiked, imports climbed, and inventories shrank.
Now, as heating demand eases, power stations find themselves with bloated inventories. Stockpiles held by China’s six major power utilities have recovered to the highest level since October 2015 after authorities forced northern coal mines and railways to maintain operation through the Lunar New Year holidays. Prices are dropping and some analysts expect further declines as mines ramp up output and stockpiles swell.
Diesel: The transport and heating oil is one commodity that may be less attached to winter. While refinery profits from turning crude into diesel surged to the highest level since 2014 as demand for use in heating expanded during the freezing weather, warmer temperatures may also be positive.
That’s because it’s now time for refineries in the region to undergo annual maintenance, keeping supplies tight at a time when demand is still healthy. Stockpiles of so-called middle distillates, which include diesel, dropped to the lowest level since 2013 in the Asian oil-trading hub of Singapore last month.
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