China Commodity Prices Surge as Beijing Fights Industrial Overcapacity

A significant surge in the prices of key industrial commodities across China this month reflects a palpable shift in Beijing’s approach to tackling deep-seated industrial overcapacity. This renewed policy resolve aims to mitigate persistent domestic deflationary pressures and address mounting international trade friction.

• Since early July, commodity prices, including steel, coal, and polysilicon, have surged by 10% to 68%.
• This market movement closely follows Beijing’s July 1 declaration to curb “disorderly price competition.”
• The industry ministry pledged to halt price wars in the solar sector, contributing to an 11% rise in China’s photovoltaic industry index.
• Polysilicon prices specifically climbed 68% amidst reports of potential industry consolidation among major producers.
• Coking coal prices hit their daily limit for three consecutive sessions following National Energy Administration inspections.
• Current capacity reduction efforts are complicated by increased private ownership, local government incentives, and limited alternative employment opportunities.

Renewed Policy Resolve and Market Impact

Since early July, commodity prices, spanning from steel and coal to polysilicon—a critical component for solar panels—as well as alumina and lithium carbonate, have seen substantial increases, ranging from 10% to 68%. This market response closely follows Beijing’s July 1 declaration to combat “disorderly price competition.” Concurrently, shares in steelmakers, solar panel manufacturers, and clean energy enterprises have notably outperformed the benchmark CSI 300 Index, indicating positive investor sentiment towards the government’s renewed commitment to tackling industrial imbalances.

The policy signal, amplified by state media warnings against “involution”—a concept describing self-destructive competition—appears to have resonated effectively within ministries, regulators, and local governments. Tai Hui, Asia Pacific chief market strategist at JPMorgan Asset Management, commented that this initiative directly addresses a major investor concern regarding profit margin compression in promising sectors. Industries, from traditional powerhouses like steel and coal to emerging fields such as solar panels and electric vehicles, have long struggled with excess capacity and declining prices, despite previous unfulfilled policy pronouncements aimed at reform.

Concrete Measures and Industry Shifts

Tangible actions have swiftly followed the top-level policy meeting. Within days, the industry ministry pledged to curb price wars within the solar sector, a move that contributed to an approximately 11% rise in China’s photovoltaic industry index this month. Polysilicon prices, for instance, climbed a significant 68% amid reports of potential consolidation among the largest producers, signaling a more structured market environment. Furthermore, a temporary shutdown of a lithium miner in northwest China due to non-compliance sparked speculation of broader regulatory crackdowns aimed at market discipline. Similarly, coking coal prices reached their daily limit for three consecutive sessions after the National Energy Administration initiated inspections to curb excess production at mines, underscoring the swift enforcement of new directives.

Navigating Complexities in Reform Implementation

While Beijing has historically implemented supply-side reforms, most notably a decade ago in sectors such as cement, steel, glass, and coal, the current challenge presents greater complexities. The industrial landscape now features higher levels of private ownership within these industries, which can lead to potential misalignments between national policy objectives and local government incentives, as local authorities often prioritize employment and economic stability. Moreover, limited alternative employment opportunities pose a significant hurdle for absorbing workers displaced by any capacity reduction efforts. These factors collectively render the implementation of these latest reforms a nuanced and intricate task for the Chinese authorities as they seek to balance economic restructuring with social stability. (Reporting by Reuters)