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China Sees Commodity Rally Driven by Government Infrastructure Push

China’s commodity futures are seeing a big rally recently boosted by the government’s pledge to support the economic growth with more credit and infrastructure spending as increased uncertainties at home and abroad threatens to drag the world’s second largest economy’s growth even lower.

The rally has been led by coking coal futures, which had surged by more than 25 per cent to 2500 yuan per tonne from 2000 yuan per tonne in 20th July. Steel rebar futures surged by 1.5 per cent on Monday to hit the highest since 2013, extending a rally since early July.

In addition, PTA futures hit the highest in four years and methanol climbed to the highest in nearly five years.

Analysts believe the rally is a response to the the increased expectation of  of monetary easing and higher infrastructure spending as the China’s top policymakers pledged to support the economic growth with policy easing, after more and more signs of economic slowdown are emerging.

The growth of gross domestic products (GDP) slowed slightly to 6.7 per cent in the second quarter compared to one year earlier. Its total social financing, a broad gauge of the total liquidity in the economy has decelerated significantly and its industrial output are also losing momentum.

The rally has been driven by a combined force of higher expectations for more infrastructure spending and tightened environmental protection measures, said Qui Yuecheng, analyst with the Everbright Futures.

China has released the latest plan for steel production restrictive measure in Beijing, Tianjin and Hebei province, under which, major steel producers in the region such as Tianjin, Shijiazhuang, Tangshan, Handan, Xingtai, Anyang will cut production activity by 50 per cent in the coming winter and by no less than 30 per cent in other cities in the region.

The State Council on 2 July unveiled a bold pollution-control scheme called “blue sky” plan which expands pollution controls to 82 cities across China. Under the new plan, polluters will receive punitive charges with the introduction of a national pricing system for carbon emissions and the contamination of water, besides other stringent measures.

In addition, in the city of Changzhou in eastern China’s Jiangsu Province, the local government has decided to steel production by 50-100 per cent to improve air quality. The city has been the most polluted city in the region.

Considering steel inventory remains record low and spot steel prices stayed strong and steel demand is likely to rise, steel futures price is expected to stay strong in the near futures, said Ren Xinpu, analyst with the Yongan Futures.

“With crude oil prices keep rising in the international market and and higher soybean and corn prices due to trade tensions are expected to drive inflation higher, which combined with monetary easing, will help drive commodity prices even higher, ” said Ming Ming, analyst with the CITIC Securities.

But meanwhile, Ren warned over risks citing economic uncertainties, slowdown in automobile sales and tightening restriction on the real estate sector.

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