China Flies Inflation Red Flag

Steel is essential to most national economies, but it is one of China’s critical components for its massive manufacturing machine which builds a wide array for products from cars and light trucks to homes and other buildings.  China said recently that its demand for the metal would soar in the next four years.

China Iron and Steel Association (CISA) predicts the country’s annual demand for steel will rise to between 670 million and 750 million tonnes in 2015. The figures are 11.8 percent and 25.1 percent higher compared with the 2010 level, said Luo Bingsheng, CISA’s deputy Party chief, at a forum Sunday,  Xinhua reports

The rise in steel production is one more contributor to the growth of inflation in the People’s Republic. Steel manufacturing depends on electricity. Electricity depends on coal. The China Coal Transport and Distribution Association reports that coal prices have reached a two year high. China has raised power prices for industrial, commercial and agricultural users in some regions by about 3% this week, according to Reuters. It could easily be the first of several increases as electricity companies face razor-thin margins due to coal prices.

Steel transportation almost certainly pushes gasoline prices higher. China is already the world’s largest net importer of crude. Oil prices may step down from $100 a barrel worldwide, but the move will be hindered if China demand remains the same or rises.

The inability to manufacture the amount of steel China needs may be the trigger of a cool down of its economy, particularly if it happens around the same time that the People’s Republic raises what it charges for oil and gas. There have been conversations for several months that the central government has fueled inflation with its oil and gas price subsidies. China has still not decided the lesser of two evils–low energy prices which help GDP and fire inflation, or high gas prices which slow expenditures and undermine GDP.

Steel demand and prices join what has become a long line of supply and demand problems China will have to address, probably before mid-year. The decisions are imminent, but the effect could last for years. Steel is too critical a part of the manufacturer’s supply chain for the government’s decision not to have broad consequences.

Douglas A. McIntyre