Chinese business under pressure from rising commodity prices

Soaring commodity prices are putting pressure on businesses in China, even as the country’s wider industrial sector rebounds from the early effects of the coronavirus pandemic, according to the official data agency.

The National Bureau of Statistics released figures on Thursday that showed a 57 per cent rise in profits at large industrial companies in April compared with a year earlier, with the sector benefiting from the comparison with a low base in 2020 owing to the pandemic. Profits grew 92 per cent in March.

The data highlighted an “uneven” improvement in corporate performance in China, the NBS said, despite the economy’s broad recovery over the past year. Higher prices for raw materials have boosted the profits of miners and other producers but they also stand to increase costs for downstream businesses further along the supply chain, the NBS added.

“The profitability of some consumer goods industries has not yet recovered to their level before the pandemic,” said Zhu Hong, an official at the NBS. “Coupled with the high prices of bulk commodities, this has increased the pressure on the production and operation of midstream and downstream industries.”

The Chinese government has expressed mounting concerns over a rally in commodity prices that has been partly driven by the country’s rapid industrial recovery as well as hopes of stronger global growth this year.

Factory gate prices in China, which are driven by commodity prices, leapt by 6.8 per cent last month, their fastest pace in three years. But consumer price inflation remained below 1 per cent.

A state council meeting chaired by Li Keqiang, China’s premier, last week said measures should be taken to avoid those costs feeding through into consumer prices.

The country’s economic planning agency issued a warning on Monday over “excessive speculation” and said it would crack down on hoarding and monopolies in commodities, which helped push the price of iron ore down 7 per cent after it hit a record high this month.

The NBS data showed profits at businesses involved in smelting of non-ferrous metals increased 484 per cent and mining profits doubled from January to April, compared with the same period a year earlier.

Consumption has lagged behind the strength of the industrial sector in China’s recovery, which saw gross domestic product growth return to pre-pandemic rates by the end of last year. That is a challenge for companies facing higher costs and consumer confidence, which has not fully recovered.

“The problem for them is that, usually it’s very hard to pass through cost pressure to consumers,” said Larry Hu, chief China economist at Macquarie.