China’s commodity frenzy likely to worsen glut in the medium term

Chinese commodity frenzy, where retail traders are marching in with their purse into commodities’ market risk worsening the glut into some commodities as well as raw materials.

In 2015, China produced about 800 million tons of crude steel, about half of global production and almost eight times the second biggest producer Japan. In 2015, global Steel surplus was more than 100 million tons, about 70% of the total production of Europe, which led to dumping of Steel into global markets by China, leading to UK plant closure by Tata Steel, country’s largest steel making unit. This massive glut led to price drop to $90 per ton in early this year, from $1265/ton back in 2008.

Point to note is, China kept on producing steel, despite lower price, fuelled by indirect state support and higher leverage.

After making bottom in December, Steel price is up more than 50% in China and recent speculative frenzy has led to more than 20% rise in April alone.

If Chinese producers could keep producing at December low, many who has closed plants will start firing engines with the rise in prices.

Once again global markets will be flooding in Steel and other frenzied commodities such as coal, iron ore and Cotton, which will not lead to recovery but prolonged supply glut and depressed price for much longer horizon, once the frenzy is over.