China is far from finished buying raw materials
Next month, the Chinese Government’s new five-year plan will be presented to Secretary-General Xi Jinping and the other executives of the Communist Party of China. According to the Bloomberg press agency, this plan will express the intention to further increase the strategic stocks of raw materials and agricultural goods. In this way, China will be able to withstand possible new shocks to its economy, as has recently been the case with the corona-pandemic and the trade tension between China and the United States. In addition to the raw materials and crops mentioned above, cobalt in particular is mentioned by Bloomberg as an important raw material. Cobalt is an important raw material for making rechargeable batteries for, among others, electric cars. Another important raw material is lithium, the price of which has recently fallen by tens of percent. Electrification of the car fleet has long been a spearhead of Chinese policy to improve air quality.
For years, China has been the world’s largest importer of raw materials. In order to ensure access to various raw materials, the Chinese have built up major interests in Africa and South America in recent years. The purchase of oil, however, is now at a lower level. The number of barrels of oil purchased has fallen sharply in recent months. This is due to the fact that China was already purchasing large stocks of crude oil at the beginning of this year following the fall in oil prices. As a result, the strategic oil stock seems to be in order for now. In addition, private Chinese refineries are now able to purchase less oil because the number of emission rights issued by the state is falling sharply.
On the contrary, the purchase of American soybeans has risen sharply in recent months, partly because of the agreements in the trade agreement concluded. This was confirmed by CFO Ray Young of Archer Daniels Midland (ADM) in front of the Bloomberg news agency at the beginning of this summer. He stated that the first phase of the agreed trade deal between the United States and China is still ‘on track’. With the deal, China pledged to buy $36.5 billion worth of agricultural goods from the United States. According to Young, this will make the fourth quarter strong for ADM. The soy season in Brazil has now ended and orders from China are now ‘automatically’ shipped to the United States. China not only needs the soybeans to feed its own population. They also serve as pig feed to rebuild the decimated pig herd. There is a serious shortage of pigs (meat) in China as a result of the outbreak of African swine fever.
What does the ECB decide?
This afternoon, the European Central Bank is holding its first policy meeting following the Fed’s remarkable policy adjustment. A fortnight ago, the US Central Bank announced, through its President, Jerome Powell, that employment will henceforth take precedence over a stable price level. From now on, inflation should be allowed to rise slightly above the target of 2% if this is conducive to employment growth. Today it is up to the ECB to respond to this. Is Lagarde, for example, copying the change in policy, or is Frankfurt still sticking to the 2% inflation target? In the past, the ECB regularly adopted the Fed’s policy, with the quantitative easing (the buy-back programmes) as the clearest example.
The ECB will have to take action. One annoying side effect of the adjusted Fed policy is that it has further weakened the dollar. Indeed, the next US interest rate hike (in order to contain inflation) has further weakened the picture. A weaker dollar means a stronger euro and thus a worse export position for European entrepreneurs. As a result, European economic growth, which has already been affected by the corona-pandemic, will once again suffer. However, Lagarde can do very little about the strong euro. The banks, pension funds and savers in the EU cannot use another cut in interest rates now. So it will remain ‘management by speech’; Lagarde will argue that the ECB is ready to further broaden its policy in order to raise inflation. She will confirm this with the latest growth and inflation forecasts. In doing so, growth for this year will be adjusted slightly upwards and that of 2021 will be reduced slightly.
Another problem that the ECB will have to tackle is disappointing inflation. The latest inflation figures (for August) were not good. For the first time in four years, inflation was again negative at -0.2% and is, therefore, deflation rather than inflation. The cause is lower consumer spending and lowers energy prices due to the pandemic. In particular, air travel, holidays and clothing prices fell. Nevertheless, the ECB will wait to kick the stimulus pedal any further. For the time being, the current Pandemic Emergency Purchase Programme (PEPP), which now amounts to EUR 1350 billion, is not expected to be expanded by the ECB watchdogs. After all, the central bank does not yet want to give up all its gunpowder now that the coronary infections in Europe are rising sharply again. In addition, it seems that several members of the policy committee are, for the time being, expecting a further recovery of the economy. A further stimulus is therefore unnecessary today. They would rather look at it for a moment and decide on an extension, if necessary, in December.