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China Perspectives series is a monthly discussion on the latest credit market and economic developments from China with experts from both within and outside of Fitch Ratings.
Welcome to China Perspectives, a podcast on economic and credit developments in China featuring experts from within and outside of Ratings. My name is Ying Huang, head of North Asia industrials property consumer and utilities at Fitch Ratings. In today's podcast, I'm joined by my colleague Laura Jai, senior director of Fitch Ratings, to discuss the impact of The US tariff hikes on Chinese commodity sectors. Laura joined Fitch in 02/2013, and she's based in Hong Kong. She is currently head of the North Asia natural resources team.
Speaker 1:Laura, thanks so much for joining the podcast.
Speaker 2:That is my pleasure.
Speaker 1:I'd like to get your views on a couple of key commodity sectors in terms of the tariff impact. Maybe we start with the metals market. Last month, the US government imposed a sweeping 25% tariff on all steel and aluminum imports effective March 2025. So let's talk about aluminum first or maybe aluminum and copper together because these two types of metals have been hot topics in a global commodities world in recent years. We know that China is the largest producer of aluminum and refined copper globally.
Speaker 1:And despite some temporary volatility, global prices have held up fairly well in recent years. Now with the trade policies from the Trump administration potentially introducing higher risks to demand, Do you anticipate any shifts in the current balance of the global aluminum and copper markets? Specifically, how might Chinese aluminum and refined copper producers be affected?
Speaker 2:Sure. Let's begin with, you know, the global market fundamentals first before we move on to China. You're right. What you mentioned earlier, there's significant amount economic uncertainties. However, recently, we've actually revised up our price forecast for these two metals due to a tight demand and supply balance.
Speaker 2:That is largely driven by energy transition efforts coupled with supply constraints. If you look at over the last couple years or so, Chinese investments into energy transition were actually the main driver for demand for copper aluminum globally, whereas the other two, other developed regions like Europe or North America have lagged behind. While we do expect China's growth to moderate to a low single digit annual rate, demand growth from other global regions is anticipated to rise. Even now when we're thinking that US and Europe might reevaluate their energy transition investments, we don't really expect a reversal in such strategies. Consequently, we actually expect global demand growth for these two metals to sustain at a rate of around two to 3% despite regional variances.
Speaker 2:On the supply side, growth remains limited, maintaining a tight market balance for both metals. We'll take aluminum, for example. China's aluminum production capacity is expected to reach its policy ceiling this year, leaving no more room for supply increases. In China, despite potential challenges in manufacturing exports, plant state grid investments could actually moderately boost demand growth for the likes of aluminum and copper by one to 2%. Moreover, China's recent GDP growth target of 5% combined with the largest fiscal deficit in thirty years, as well as ongoing green energy investments might provide upside potential for demand growth this year as well.
Speaker 2:Regarding US tariffs, we foresee a limited direct impact on China's aluminum sector as The US market accounts for only about 4% of China's total aluminum export. With about 90% of production meeting domestic needs and the Chinese government discouraging export recently with the rebate being removed, the impact remains contained. As a result, Chinese aluminum producers are likely to maintain strong financial performance this year, supported by robust price expectations and strong market fundamentals. In contrast, Chinese copper producers might face some distinct challenges. Despite optimistic prices forecast, many producers are actually downstream refineries dependent on upstream copper concentrate production.
Speaker 2:Those with high self sufficiency in raw materials might benefit from elevated prices, while pure refineries could experience margin compression due to tight concentrate market conditions.
Speaker 1:Okay. So aluminum and copper are going to see polarized performances. Good. Let's move on to steel. We know that China has the largest steel production capacity in the world.
Speaker 1:While The US market is not a primary export destination for China, I imagine there could be pretty significant repercussion for the non Chinese steel exporters who may look to divert their exports elsewhere because of The US tariff hike. So do you think there could be increased competition in China's key steel export markets from those other non Chinese steel exporters? And how might the current situation impact Chinese and other Asian steelmakers?
Speaker 2:China's direct steel exports to The US are actually relatively small, accounting for less than 1% of its total steel exports. However, the impact of US tariff hikes is complex due to potential indirect exports via exempted countries or downstream industries like shipbuilding and automobile. While increased competition in China's key export markets could arise from other seal exporting countries, the effect is likely to be very moderate. This is primarily because countries like Korea and Japan, which have significant exports to The States, focus mostly on high value specialty products, whereas China's key export markets generally demand low cost long products for construction needs. In addition, Chinese steel producers benefit from some of the lowest processing costs globally, providing a strong cost advantage.
Speaker 2:Now given the low profitability within the Chinese steel industry, a decrease in export is actually expected to lead to a direct decline in production. In contrast, other regional steel producing countries might face greater challenges should regional competition intensify. For instance, last year, India's steel industry suffered significant losses due to Chinese exports. However, trade protectionism is likely to intensify even within the APAC region, adding pressure on exports. For example, Vietnam, which is China's largest export destination for steel products, is set to impose temporary antidumping duties on Chinese hot rolled coil imports since February.
Speaker 2:In summary, while The US tariffs might not drastically disrupt Chinese export directly, they contribute to a challenging environment marked by increasing regional protectionism as well as competitive pressure.
Speaker 1:Right. I suppose that will further intensify the oversupply situation in a steel industry. And maybe along the same line, we can talk about chemicals, which is also in overcapacity. We know China already has the largest chemical production capacity, and it continues to expand with significant new capacity in their construction. Do you foresee the oversupply situation, and not just in China, but also also in the APAC regional market continuing to worsen in 02/2025 considering the growing demand risks.
Speaker 2:Okay. Well, chemical is a very wide industry. So to address this question, I think we should pull back and start by looking at basic supply and demand dynamics of the whole chemical sector. So if we look at on the supply side, China continues to expand its production of commodity chemicals like you mentioned earlier. For instance, since 02/2023, China has contributed to over 40% of global capacity increases in ethylene.
Speaker 2:On top of that, Southeast Asia and India are building their chemical industries, and The Middle East is actually shifting some of the capacity to the APAC region as well. These developments could lead to increased competition and, of course, additional oversupply. On the demand side, if the global economy remains sluggish, regional exports will suffer, particularly if European demand declines. So in China, demand growth in sectors like, you know, property is already slowing. Although new energy sectors are expanding, they may not fully offset this slowdown.
Speaker 2:Southeast Asia could also face challenges, especially given that it relies heavily on exports and the rising global protectionism. However, some of the factors might help ease the oversupply situation. For example, China's dual carbon policies aimed to reduce inefficient capacities. Asian countries are focusing on industrial specialization to avoid redundancy. And especially, you know, in China as well, companies are are increasingly shifting towards high value products and new energy materials, which will help balance the market.
Speaker 2:So if we consider all these factors together, we actually expect structural oversupply issues in the region to persist this year, leading to weak prices, especially for commodity chemicals where the oversupply is abundant. However, specialty chemicals, new energy materials, and, you know, the likes of high value agrochemicals are likely to outperform as their cost base, which is mostly commodity chemical ingredients, will remain low. So I hope that answer the question.
Speaker 1:Well, Laura, a large proportion of your team's reading coverage is from the energy sector, so perhaps we can end our podcast with the energy commodities. China stands as the largest importer of crude oil and natural gas, while The US is a major exporter of these two commodities. In February, China imposed retaliation tariffs on exports of crude oil and LNG in response to US tariffs on Chinese goods. Could this lead to an increase in China's imported energy costs?
Speaker 2:Our view is that while such retaliatory tariffs could temporarily raise China's imported energy costs, and I mean, temporarily, the broader impact is actually very much limited. If we look at in recent years, China has strategically diversified its energy partnership, reducing reliance on any single source. While China accounted for about 6% of US's LNG exports last year, it can actually easily seek alternative supplies from other regions. Take Russia, for example, the Siberia pipeline, which began operation in 02/2019, now supply gas directly into China. There also can be new agreements, you know, to expand this.
Speaker 2:Similarly, China's long term LNG deals with Qatar or Australia can also provide flexibility. On a global basis as well, energy markets remain oversupplied, limiting the risk of sustained price hikes. Now US producers hit by Chinese tariffs could redirect exports to Europe or other parts of Asia. However, OPEC plus also had a large, you know, spare capacity in January and had indicated plans to start unwinding production in April as well, which indicate weak demand in other regions. So I think from that perspective, we do expect that, yes, very temporary increase in cost, but, you know, over the medium term, such increase will be far offset by the increase in competitive prices globally.
Speaker 1:Okay. I see. Thank you very much, Laura, for your great insight. We're now coming to the end of our podcast. You have been listening to Fitch Ratings China Perspectives podcast.
Speaker 1:To learn more about our ratings and research on China, visit us at FitchRatings.com. Please subscribe to iTunes, Spotify, or wherever you get your podcast. Take care until next time.