China: A Message for Washington, and Commodity Targets

Published on February 4, 2021
SGH Insight
The full-year rare earth mining quota for 2021 has been set at 140,000 tons, the same as in 2020. Officials expect the actual (as opposed to target) production of rare earths to come in slightly below that, at 130,000 tons. For reference, the rare earth mining quota for 2019 was set at 132,000 tons, and for 2018 it was 120,000.

China will also continue to tightly control the export of other strategic and scarce materials for 2021. Natural graphite, tungsten, magnesium, and manganese export quotas will remain unchanged from 2020, already down over 40% year on year from 2019, and from previous year, levels.

Market Validation
(Bloomberg 2/16/21)

China is exploring whether it can hurt U.S. defense contractors by limiting supplies of rare-earth minerals that are critical to the industry, the Financial Times reported. Industry executives said government officials had asked them how badly companies in the U.S. and Europe would be affected if China restricted rare-earth exports during a bilateral dispute, the FT reported, citing people it didn’t identify involved in the consultation.

China’s State Council earlier this year reviewed and approved the overall NDRC (National Development and Reform Commission) 2021 major industrial output targets as well as the joint NDRC/MOC (Ministry of Commerce) major commodities import and export targets for 2021.

Our understanding is that with regards to the US-China “Phase One” trade accord, China’s Premier Li Keqiang made it clear at that meeting that China would import about $160 billion of US products in 2021, including no less than $30 billion in agricultural products, assuming the Biden administration continues to implement the Phase One Trade Accord.

*** Even more importantly, Premier Li also delivered a message to the leadership in Beijing that China would increase its import target for US goods to “no less than” $200 billion for 2021 if the Biden administration were to agree to lower, or even remove, all “additional” tariffs, which we take to mean tariffs enacted during the trade wars with President Trump, by August 31 of this year. ***

Our presumption is that Beijing is fully aware a public and direct offer to roll-back tariffs could prove politically treacherous waters to navigate for both Washington and Beijing, especially in the very beginning of the Biden presidency. But we suspect the intention of the leadership is for this offer of economic de-escalation to make its way to the US Treasury and to the White House.

We do not yet know why the August 31 date was chosen or what it represents.

Not surprisingly, Li also stressed that in addition to increasing imports from the US, China would continue to increase its imports from the EU and ASEAN nations, and in particular from Russia, South Korea and Brazil.

2021 Commodity Targets and Quotas

Beijing’s plans are based on growth projections for this year of about 8.0% for GDP, 6.0% for value-added industrial output, 5.0% for exports, 8.0% for imports, and for a 10.0% average price increase in major commodities.

Regarding commodity prices and imports, the relevant economic departments reported to the leadership that they believe commodity prices will remain stable or rise modestly from here, after prices, most notably crude oil, bounced back to “normal” levels from the pandemic induced collapse of early 2020.

China will increase its imports of commodities, especially energy, agricultural products, non-ferrous metals, and high-tech products. However, Beijing will continue to put “severe limits” on the production output of certain strategic and scarce resources.

China’s total global import target for agricultural commodities for 2021 has been set at over $200 billion, which would be about $30 billion higher than the $170.5 billion worth of imports for 2020. For reference purposes, China’s agricultural imports totaled $150.9 billion in 2019, and $137.1 billion in 2018.

The full-year rare earth mining quota for 2021 has been set at 140,000 tons, the same as in 2020. Officials expect the actual (as opposed to target) production of rare earths to come in slightly below that, at 130,000 tons. For reference, the rare earth mining quota for 2019 was set at 132,000 tons, and for 2018 it was 120,000.

China will also continue to tightly control the export of other strategic and scarce materials for 2021. Natural graphite, tungsten, magnesium, and manganese export quotas will remain unchanged from 2020, already down over 40% year on year from 2019, and from previous year, levels.

And in what can only be interpreted as a clear political broadside, China plans to reduce its imports of iron ore from Australia to less than half of current levels in five years. For reference, China imported 730 million tons of iron ore in 2020 from Australia, accounting for over 60% of its total imports.

Finally, assuming a strong domestic and global rebound from last year’s recession, officials expect imports of pig iron, crude steel, and overall steel production to grow slightly this year, and to hit new all-time highs.

 

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