Surge in prices of raw materials casts shadow on China's industrial sector

Beijing [China], May 26 : A wave of shutdowns and temporary production stoppages across Chinese factories due to surging costs of raw materials has raised concerns over inflation risks in the world's second-largest economy.
Across Guangdong province, small and medium-sized enterprises in the Chinese industrial chain are lamenting that it may be even more difficult to stay afloat this year than the previous one, reported South China Morning Post (SCMP).
As the COVID-19 pandemic takes a heavy toll on supply chains across the globe, some Chinese manufacturers say it has become too expensive to source the materials they need to make the goods they sell.
Modern Casting Ltd, one of Guangdong's biggest factories supplying iron and steel castings, said in a statement last week that it will not be able to fulfil the orders it received, citing crippling price increases and a lack of raw materials.
"The cost of casting materials has far exceeded the company's gross profit, and it has reached the point where we can no longer afford any loss," the statement said.
A smaller casting factory, JiangXin Foundry Ltd, also had to reduce production, and its chief production manager said that the factory was operating for only four days at a time.
Huo Huagen said that the price of scrap steel, which was the main raw material of JiangXin Foundry enterprise had skyrocketed to more than 4,500 yuan a tonne in recent weeks. "It means that, the more we produce, the more we lose. Each tonne we produce is equivalent to a loss of 1,500 yuan," he said.
Meanwhile, workers at the factory are also struggling, with their monthly salaries dropping to about 3,000 yuan as they lose shifts, SCMP reported citing Huo.
"Our biggest customer is [the Chinese branch of] a Japanese elevator company, and we have already proposed a 15 per cent price increase to downstream companies for new orders," Huo said. "They have not yet responded."
In Guangdong's Bangzhan Construction Formwork Ltd, the sales manager said that the price of aluminium had risen to over 20,000 yuan a tonne in a span of two weeks this month.
"Chinese manufacturers ... dare not proceed with normal mass production," said the manager.
Home appliance producers in the province have similarly halted production to various degrees on price-inflation concerns.
Zheng Leqiang, who runs a kitchen appliances factory in Zhongshan, Guangdong, said that his company is still struggling to recover from the effects of the pandemic, as many Chinese consumers are still reluctant to spend money on small home appliances and household renovations, SCMP reported.
As a result, the industry has been generating zero profit, and many small household appliances factories - especially those with fewer than 100 workers - have had to shut down in the past month", he said.
On Monday, the National Development and Reform Commission (NDRC) said that China would strengthen price controls on iron ore, copper, corn and other commodities in its 14th five-year plan (2021-25) to address the fluctuations in prices.
Global metal prices, including for copper, iron ore, zinc, nickel and aluminium, have skyrocketed in recent weeks. Copper, for instance, has hit US$10,000 a tonne while iron ore has been trading above USD 200 a tonne.
However, even though Beijing has said it intends to curb inflation risks, some analysts say there are not many options to control commodity prices because China relies so heavily on imports of raw materials such as iron ore from Australia and Brazil.
Despite an option for China being curbing its steel exports, such measures have not been effective as global demand for steel is still on the rise, and a curb in steel exports from China would drive up prices, reported SCMP.
China's ongoing tensions with Australia has also played their part in an upsurge of iron ore prices in Beijing.
The surge has raised concerns about market speculation with Chinese officials, who at the beginning of the month cut tariffs on some iron and steel inputs as a cooling measure.