China has decided to take global commodity bulls by their horns ⁠— to protect the profit margins of its small businesses

China has decided to take global commodity bulls by their horns ⁠— to protect the profit margins of its small businesses
FILE PHOTO: Railway workshop PAREL. Workshop makes engines to haul wagons on broad and narrow gauge tracks.Uma kadam/BCCL
The government in Beijing has ordered its state firms to stop buying commodities like iron ore, copper, aluminium, zinc and others from foreign countries, according to a Bloomberg report, which cited sources it didn’t name.

This has led to a sharp dent in sentiment in global commodity markets. Even in India, the metal stocks, which were in the middle of a historic rally, took a dive soon after the news broke.

StockJune 16, 11:35 a.m.Last 12 months
Tata Steel-2.21%268.7%
Jindal Steel and Power-2.93%184%
Steel Authority of India-3.1%346.95%
JSW Steel-1.94%271.48%

The expectation from the Xi Jinping administration is that in the absence of big buyers from China, global prices of raw materials will fall. Therefore, the smaller businesses will get a better price for the inputs, and be able to protect their profit margin.

China has been increasingly wary of the global surge in prices of key raw materials used in industry. Since the pandemic has curbed the consumer’s purchasing power, companies have not been able to pass on the rising cost of commodities, and therefore, the profit margins are getting squeezed.

Last week, the cost of raw materials, measured by the producer price index in China, hit the highest level in 12 years.

The policy measure will go beyond stopping commodity imports. The state firms will need the inputs to keep their business running. China’s National Food and Strategic Reserves Administration will soon release state stockpiles of metals including copper, aluminum and zinc, instead of relying on global suppliers. The metals will be sold in batches to fabricators and manufacturers.

China has been the world’s biggest guzzler of commodities for many years. However, in recent times, the world’s second largest economy has shifted its focus to domestic consumption instead of being an exporter to the world at large.

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