The Drought Is Testing Commodities in China.
Rice, lithium and aluminum are affected by water shortages in China.
China is suffocating, like the rest of the world. The former Middle Kingdom is experiencing a historic heat wave, and one has to go back to 1961 to find traces of a drought of this magnitude. The Yangtze River is almost dry to the point of cracking in places. This extreme weather is not only having an impact on people, but also raw materials.
Rice, lithium, and aluminum are the main victims.
In the regions along the Yangtze River, rainfall has dropped by 45% in July 2022 compared to their normal levels, according to the Ministry of Water in China. A disaster for agriculture. “The rapid extent of drought, exacerbated by high temperatures and heat damage, poses a serious threat to fall agricultural production,” the Ministry of Agriculture confirmed on August 24, 2022. “The risks to grains are significant, as the six affected regions account for 48% of China's rice production,” Goldman Sachs analysts said in a note.
A sensitive subject for Xi Jinping
The situation is so delicate for the crops that China is even trying to trigger rains by throwing silver iodide into the clouds. This comes at a time when grain markets are already under high pressure due to the war in Ukraine.
Although Beijing is almost self-sufficient in rice, wheat, and corn, any shortfall in local production means huge purchases in the international markets. Food security is a sensitive issue in a country still marked by the great famines of the Mao era, which killed tens of millions of people.
The agricultural world is not the only one to suffer from drought. In the metallurgy industry, too, the weather is closely monitored. The manufacture of aluminum by electrolysis is a highly energy-intensive process since in China it takes no less than 13.5 MWh for a single ton of metal. Some industrialists have fun saying that aluminum is reliable electricity. The problem is that the rivers are dry and the dams do not generate enough electricity for everyone.
As a result, the rare electrons available are directed more to the air conditioners of individuals than to the electrolyzers of industrialists. Goldman analysts estimate that China could lose 300,000 tons of production this year, in addition to the 360,000 tons already lost. However, the effect on world prices should remain limited. Yunan province, the main production hub, is not affected by the drought. In addition, fears of a global recession are weighing on prices.
Lithium is also exposed to power cuts, as Sichuan is home to 20% of China's production capacity. One of the world's giants, Tianqi Lithium, even has its headquarters in the province. For several days, producers have been cutting back on the production of the white metal.
“Stocks are very low, and if the disruptions continue through August, deliveries for September could be affected,” says Susan Zou of Rystad Energy. Prices could spike again. They are already trading at $70,000 per ton, up from $17,000 at this time last year.
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