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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 US$203.65 a tonne in the week to Oct. 1, up 12.7 per cent from the prior week.

Spot LNG prices in Asia also leapt to a record high last week, hitting US$32 per million British thermal units (mmBtu), amid reports of some cargoes trading as high as US$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 effects 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, aluminum 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 to 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.


A standout example could be aluminum smelters in Australia, where power prices have yet to rise as most coal-fired generators have longer-term supply contracts that are insulated from the current surge in spot prices, and the increasing share of renewable generation is cheap.

A further boost for non-China metal producers could come in the form of lower exports if Beijing prioritizes domestic supplies.

China exported 490,000 tonnes of unwrought aluminum and products in August, according to customs data, up from July’s 470,000 tonnes. However, over the first eight months of the year, aluminum exports slipped 10.3 per cent.

China also exported 5.05 million tonnes of steel products in August, down from July’s 5.67 million, and well below the 2021 peak of 7.97 million in April.

If domestic steel prices do rally on power-related curbs to production at mills, it would be logical to assume that steel exports will continue to fall.

However, if metal production in China does dip on power curbs, this would be bearish for the raw materials used, such as iron ore, alumina and bauxite, as well as base metal ores such as copper and nickel.

Iron ore has already given up all of its gains in 2021, with the spot price for delivery to north China ending at US$118.05 a tonne on Oct. 1, down almost 50 per cent of its record high US$235.55 reached on May 12.

In some ways what has happened to iron ore is likely to repeat with thermal coal and LNG.

Iron ore surged from its coronavirus pandemic-induced lows of US$79.60 a tonne in March last year to the record high amid strong Chinese demand and supply constraints in top exporters Australia and Brazil.

But as soon as China started cutting steel output, and the weather disruptions ended in Australia and Brazil’s coronavirus-related cutbacks eased, iron ore plunged.

Right now thermal coal and LNG are hitting record highs amid the same story of massive Chinese demand and supply constraints in major exporters, with coal producers in top exporters Indonesia and Australia lacking the ability to rapidly boost output, and LNG exporters in several countries battling unplanned outages.

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