Raw Material Prices Rise With China’s Financial Stimulus Measures

The Central Bank of China announced the most powerful package of financial stimulus measures since the after-pandemic time. Most of raw materials prices are indicated positive dynamics. On September 24, the People's Bank of China announced the most powerful package of economic stimulus measures since 2019. It includes a 0.5 basis point reduction in the bank reserve requirement ratio, which will free up about 1 trillion yuan ($142 billion) for new lending, as well as a reduction in the seven-day reverse repo rate to 1.5% from 1.7% per annum. What's more, For the average mortgage interest rate, it decreased by 50 bps, lowering minimum down payment requirements.

 

Amid announcement by China's central bank, steel raw materials – coke and coking coal, as well as steel products – prices are rising rapidly on the assumption that these steps will help improve the situation in the metal products market. However, commodity prices are still significantly lower than at the end of May due to slowing growth in China and a crisis in the country's steel industry, as well as heavy supplies from Brazil and Australia. Due to macroeconomic stimulus, ferrous metal prices will rise in the short term, but the spot market remains cautious. If demand for metal products does not improve significantly, raw materials supply and demand will not reach balance, so downside risk still exists.

 

Analysts at ANZ also note that while the stimulus measures should stem the deterioration in steel market conditions, they are unlikely to boost demand in the short term as this year's steel output will be lower than last year.