SURGING PRICES RAISE RISK OF IMPORTED INFLATION FOR CHINA

Ukraine war has pushed up cost of key raw materials including oil and nickel for mainland firms

Wild swings in the prices of energy, metals and other raw materials triggered by Russia’s invasion of Ukraine may start to weigh on China’s economy, raising inflation concerns on top of worries over production costs and supply chain disruptions, according to analysts.

Benchmark Brent crude oil prices had fallen from highs of more than US$139 per barrel on Monday, but still increased the risk of “imported inflation” for China, said Lu Zhengwei, chief economist at Industrial Bank.

“China is a major importer of commodities, and rising commodity prices may push up the year-on-year cost of its imports,” said Lu, who estimated crude oil imports accounted for around 10 per cent of the country’s total imports by value.

The producer price index (PPI), which reflects the prices that factories charge wholesalers for products, rose by 8.8 per cent in February from a year earlier, down from 9.1 per cent in January.

But while the growth of the headline figure slowed, the PPI grew by 0.5 per cent from the previous month, the data released yesterday showed, marking the quickest month-on-month gain since a 2.5 per cent rise in October.

China International Capital Corporation said the escalating conflict between Ukraine and Russia, coupled with the long list of sanctions imposed by the United States and the European Union, would significantly drive up commodity prices and disrupt supply chains.

“We believe this may lead to a slower year-on-year decline in the PPI in the first half of the year,” the broker said.

The country’s export growth in January and February combined was 6.3 per cent from a year earlier, down from December’s gain of 29.9 per cent.

“The high comparison base and headwinds from high commodity prices and supply chain disruptions contribute to expectations that China’s export growth will continue to moderate,” UOB Group said.

China is the single largest buyer of Russian oil, having accounted for 20 per cent of exports last year, according to data from the International Energy Association, and has so far not banned imports. The US has imposed an immediate ban on Russian oil and other energy imports, which could trigger a further rise in prices.

“How high oil prices will need to go depends primarily on how much and for how long the market will need to shun export barrels from Russia and whether other buyers, such as China, will step in to increase purchases of oil from Russia,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy.

The price of one of China’s other key imports, nickel, has also surged to a record high on both the domestic and international markets.

The Shanghai Futures Exchange said on Tuesday it would take further measures to account for market conditions after the metal had surged to a record high of 228,810 yuan (HK$283,387) per tonne.

The London Metal Exchange was forced to suspend trading in its nickel contracts after prices soared past US$100,000 per tonne, a record high for the metal, which is an essential raw material for stainless steel and battery producers.

The volatility in nickel prices triggered concerns from investors in state-owned Metallurgical Corporation of China.

On Tuesday, the Beijing-based construction firm assured investors that it did not have any exposure to the nickel futures market.

“At present, due to the influence of geopolitics, low inventory and financial markets, the price of international nickel metal futures has risen sharply and rapidly, which has deviated from the fundamentals,” the company said.

“High prices will be beneficial in the short term, but we must also pay attention to the ability of the downstream market to withstand [the higher cost of production].”

Russia is the world’s thirdlargest supplier of nickel, accounting for nearly 13 per cent of the global mining capacity in 2021, according to Rystad Energy.

“Fears over nickel supply disruptions following the RussiaUkraine conflict continued to be aggravated, inciting extensive buying on both [the London and Shanghai] platforms,” Rystad Energy said on Tuesday.

S&P Global Commodity Insight also said on Tuesday Russia’s metal industry was expected to lean on China as an export market in response to the sanctions.

China’s unwrought non-alloy nickel imports from Russia hit 44,693 million tonnes in 2021, accounting for 20.3 per cent of its total imports of the metal.

“It is in nickel, metallurgical coal, copper and aluminium where there is scope for the two countries to expand trade, especially given China’s electricvehicle ambitions, which require a steady supply of nickel,” S&P Global Commodity Insight said.