Chinese Inflation Peaks To 3.6 Per Cent

Inflation in China accelerated at a more-than-expected pace for March 2012. The consumer price index (CPI) for March has increased to 3.6 per cent from a year earlier after gaining 3.2 per cent in February. The increase in the CPI was mainly on account of the increase in the food prices. The increase in Chinese inflation can become a major issue for the country and for other nations as well which are directly or indirectly associated with the Chinese economy. One of the major industries dependent on China is that of metals since China is the largest producer and consumer of ferrous and non-ferrous metals.

The Chinese economy is at presently facing a tough time while trying to maintain the balance between inflation and growth in the medium and long term. In the last few months the economy has slowed down and will not see the similar type of growth that was witnessed earlier. Also, Chinese premier Wen Jiabao has lowered its GDP growth target for FY12 to 7.5 per cent. This is the lowest target set in the last seven years. The official further stated that a lower GDP growth was targeted in order to maintain qualitative demand-driven growth and not just supply or export-driven with the aim of keeping inflation under control at 4 per cent this year.  

The markets were expecting some monetary easing by the Chinese government to sustain its growth trajectory. However, with inflation moving high the government will now postpone this plan till there is some cooling off. In February the central bank lowered the reserve requirements for the banks to boost liquidity in the economy, but that may not be enough to keep growth from slowing further.

The Chinese economy will find it difficult to boost the country’s moderating growth without easing the monetary policy in the coming months and if this happens its impact will be seen on the demand for base metal and steel too. This will result into an inventory pile and the falling of metal prices. Chinese steel production in January fell down by 13 per cent on a YoY basis and rose by just 3 per cent in February, pointing towards a weaker demand in the economy.

Severe market conditions such as reducing steel prices, intensifying over-supply, fluctuating raw material prices and global price risks can all collectively impact the major steel players. The continued weak demand has resulted in an inventory pile-up for the steel companies, impacting the cash cycle and resulting in de-stocking of this inventory at lower prices. This ultimately impacts their margins.

In conclusion we believe that if demand in China does not improve we can see a downfall in the metal prices in the coming months all across the globe. The repercussion may also be reflected in the Indian markets if our domestic consumption does not recover and sustain in the coming months.