The energy crunch in China has some obvious winners, with coal and liquefied natural gas (LNG) prices surging to record highs, but the outlook for other commodities is more mixed and dependent on how the crisis plays out.
China’s officials have been scrambling in recent days to ensure that the world’s second-biggest economy has sufficient fuel supplies for winter, basically calling on traders and utilities to do whatever it takes.
It’s little surprise that benchmark Australian thermal coal prices at Newcastle port, as assessed by commodity price reporting agency Argus, spiked to a record high of $203.65 a tonne in the week to Oct. 1, up 12.7% from the prior week.
Spot LNG prices in Asia LNG-AS also leapt to a record high last week, hitting $32 per million British thermal units (mmBtu), amid reports of some cargoes trading as high as $36 per mmBtu.
These prices speak to a certain level of desperation as Chinese buyers try to secure cargoes ahead of winter demand.
But it’s also likely that the current rally is temporary and won’t last beyond winter, given that demand for fuel will diminish as the cold weather moderates and China will likely by then be able to ramp up domestic coal output, and even boost domestic natural gas production.
But the secondary impacts from the current energy crunch could be longer lasting.
What commodities are affected will largely depend on how China chooses to ration power demand over winter.
Current indications are that producers of primary metals will be asked to cut back more than secondary users such as manufacturers.
If this is the case it should mean China will see lower production of metals such as steel, aluminium and refined copper.
But if the consumers of these metals, such as manufacturing and construction, are able to continue to operate in order to try and maintain economic growth and employment, it will serve to boost prices as supply becomes constrained.
This could benefit non-China producers of metals, especially those operating in countries where energy prices haven’t soared.