China's NPC brings clues to commodity bullies and bears

China's commodity market entered the second half due to bearish movements, and expectations were raised that the government would show how to deal with issues surrounding excessive production capacity and sluggish demand at a large-scale policy meeting to be held in Beijing next week.

The Third National Congress is usually a venue for long-term political and economic reforms. However, fine-tuning policy frameworks may still have important implications.

Paul Bloxham, chief economist in charge of global commodities at HSBC Holdings, stated, “There is a view that China is likely to provide further support for economic recovery, but investors do not have a clear idea of the extent to which it will focus on raw materials.” “We are watching closely what will be brought to bear in real estate, infrastructure, and manufacturing.

China is the world's largest importer of commodities and a major supplier of clean energy. Policies responding to the energy transition, President Xi Jinping's “new productivity” in high-tech industries, and unified national markets are likely to have a direct impact on commodity supply and demand. In addition, there are fields such as the housing crisis, tax system/debt issues, rural reforms, etc., which are likely to be clues for both bullish and bearish groups.

The solar sector is in trouble. Prices have dropped to record lows due to excessive power generation capacity and fierce competition. At the same time, power grids are struggling to cope with the amount of power generated by renewable energy, which China introduced ahead of the rest of the world. For Beijing, which expects solar power generation as one of the “three new” drivers of economic growth, solving industry problems has become a top priority.

If the NPC focuses on unifying China's highly regionalized markets, the power grid would be the perfect starting point. Most of China's solar power is supplied from mega-bases in inland regions far from major cities. A nationwide deal that makes it possible to supply clean electricity where it is needed based on market prices will help resolve industry issues such as bottlenecks and waste.

If that happens, spending for grid connections will also increase, and demand for metals such as copper and aluminum will also increase.

As the Chinese economy was plagued by factory deflation and a protracted real estate crisis, copper retreated from an all-time high in May because Chinese buyers were disgusted by rising costs. Consumption has recovered to some extent due to price cuts. However, in order to maintain it, the market may need to further prove that copper demand is central to Beijing's economic recovery plan.

Citigroup anticipates that the plenum will lead to investment in power grids and clean energy, as well as greater support for the real estate market. Even if copper is said to be environmentally friendly, housing is still the main source of consumption, including electrical appliances associated with home purchases.

Xi Jinping also has plans to develop an emerging high-tech industry in order for China to shift its focus from the old economy to the new economy. Lee Shwezi, representative of the Chaos Sanary Research Institute, said, “There is no doubt that in the transportation field, it means electric vehicles. However, he stated that measures to promote the growth of the so-called low-altitude flight economy, such as drones and flying cars, and more mundane initiatives, such as digital traffic management systems, will also boost demand for metals such as copper and tin.

The steel market remains the bastion of the old economy and is being hit the hardest by the domestic real estate woes. This is because demand for steel depends on new construction rather than on cheap mortgages or reorganization of unsold houses. And China doesn't need as many houses as it used to.

However, according to Australian Commonwealth Bank analyst Vivek Dahl, there is a possibility that reorganizing national finances from local governments with large debts will be positive for the market. “If we increase the debt of the central government and shift in the direction of reducing the debt of local governments, the possibility of spending will expand.

This means that national spending on public works, which is a good material for the steel market, will increase, but it must be said that Beijing has so far avoided large-scale spending, which was characteristic of previous recessions. Either way, as the economy matures, infrastructure spending is becoming less steel-intensive.

No market is more threatened by China's transition to clean energy than crude oil. The rapid spread of EVs means that demand in China, which is the world's largest importer, has already reached its peak. Further policy support for EVs would be unfavorable for oil refiners with unprecedented excess production capacity.

However, there is a possibility that the NPC is preparing another troublesome surprise. Amy Sun, who works as a project manager at GL Consulting in Guangzhou, points out that there is a possibility that Beijing is considering measures to raise funds by expanding the scope of taxation.

Chinese independent refiners (teapots) have a history of evading taxes to make up for low profits. According to a survey by China National Petroleum Corp. (China National Petroleum Corp.), which is China's largest oil company, about 40% of gasoline and diesel sold in teapots were not properly taxed last year.

The reforms “will motivate local authorities to monitor the tax compliance of independent refiners, and there is limited room for tax evasion,” says Sun. If that happens, there is a possibility that the profits of the sector, which accounts for about a quarter of domestic oil processing, will be further squeezed. According to Mr. Son, the number of teapots will eventually decrease, which may be a kind of solution to the lack of domestic production capacity.

Rural reform and food security continue to be top issues in Beijing. In the long run, since China is vast, it means that there is not enough farmland for the number of citizens. According to a JPM Morgan Chase survey, China's arable land area is only 7% of the world, but it feeds about 20% of the world's population, and imports make up for the shortfall.

However, there are also short-term stresses that Beijing must deal with. Prices of staple foods such as wheat and corn are sluggish, and due to the combination of sufficient supply and poor demand, the income of farmers is sluggish. At the same time, the climate is becoming unstable (floods in the south and droughts in the north in recent weeks), posing a long-term threat to domestic production.

There is a possibility that the National People's Congress will announce that more cultivated land will be freed up, that farmers will be given financial support, and that their ability to recover quickly from extreme weather events will be strengthened.