TOKYO -- Prices of copper, aluminum, zinc and other commodities have escaped the doldrums they fell into last year, setting new highs in recent months, helped by China's drive to clean up its environment and improve its infrastructure.
Prices of three-month copper futures on the London Metal Exchange temporarily climbed above $7,000 per ton for the first time roughly in three years in October. Aluminum topped $2,200 for the first time in more than five and a half years, and zinc has returned to where it was before the global financial crisis.
"Investment money is flowing into nonferrous metal markets as the Chinese economy, which is underpinning higher material prices, has firmed up," said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting. The flow is also accelerating as return-hungry investors look for somewhere to park their money in a low interest rate environment.
Prices for crude oil, metals, grains and other commodities soared in the 2000s as demand strengthened in China and other emerging economies. But by the middle of the 2010s, prices sagged as markets became glutted. Unlike the earlier supercycle, in which strong demand drove prices higher, the current rebound owes mostly to a drop in supply.
The economic policies of Chinese President Xi Jinping are the biggest factor to the current round of price rises. The government is strengthening environmental regulations, forcing closures or productions cuts at factories that fail to meet the standards.
Nomura Securities, a Japanese brokerage, estimates global demand for aluminum will reach 61.64 million tons in 2017, outstripping supply by 1.7 million tons. "There is strong concern about a shortage as China is curbing operations at domestic spot aluminum plants," said Eli Owaki, an economist at Nomura. China is the world's largest producer of aluminum.
Similarly, moves by Beijing to restrict the import of copper scrap with impurities has helped push copper prices higher by increasing demand for copper ingots for use in construction and the automotive sector.
China has also cracked down on illegal steel mills that crank out low-quality products, tightening the market. And as demand for higher quality steel has risen, so has that for the coking coal used to make it. A cyclone in Australia, a major producer of high-quality coal, contributed to a surge in prices to $300 per ton in April.
"Chinese companies have shifted their emphasis to the environment and away from profitability," said Kiyoshi Imamura, managing director at Tokyo Steel Manufacturing.
Local governments in China have fallen in line with the central government's efforts to curb electricity generation from dirty coal-fired power plants. In Shandong Province, there are moves to order aluminum smelters, which use a lot of electricity, to reduce capacity.
The policy of limiting certain types of industrial production in China is driving the rebound in commodities.
Laying the groundwork
China's push to develop its infrastructure and promote electric cars is also juicing demand for nonferrous metals. Investment in construction of roads, airports and other infrastructure jumped 20% in the January to September period from a year earlier, reaching a record high. This is a shot in the arm to the economy at a time when private-sector investment is said to be flagging.
The shift to electric vehicles has raised prices for such nonferrous metals as nickel and lithium, which are used to make batteries, and aluminum, which makes for lighter cars. The uptrend in prices is self-reinforcing: Rising prices encourage investors to buy now, before prices rise still further.
China accounts for 40% of global demand for lithium. The government in June eased regulations on joint ventures between foreign and Chinese automakers to give a lift to the market for electric cars. That has pushed up domestic prices for lithium by more than 30% since the start of the year.
International prices for nickel began rising faster in early November on expectations of stronger demand for the metal, which is also used in electric cars. They are now hovering near their highest level since June 2015.
Tokyo-based market researcher Fuji Keizai forecasts that the sale of electric vehicles in China will rise 20% on the year in 2017 to 290,000 units.
Prices for inputs are expected to maintain "stable growth trends," said Koichi Takahata, senior managing executive officer at Japanese trading house Sumitomo Corp. "We don't expect them to move up and down erratically."
Other market watchers also predict prices for raw materials, particularly nonferrous metals, will remain solid, noting the strength of the world economy and the price-boosting effect of tighter environmental regulations and higher demand for electric cars in China.
But Nomura Securities senior economist Tatsufumi Okoshi said that because the current price rises are driven by a fall in supply, the long-term outlook is unclear.
Naohiro Niimura, a partner at Tokyo-based research and consulting specialist Market Risk Advisory, said: "A risk factor is the Chinese government's move to put the brakes on economic activity."
China looks set to continue playing a huge role in determining where commodity prices go from here.