China Commodity Prices Surge as Beijing Targets Industrial Overcapacity

Commodity prices in China, from steel to polysilicon, have soared this month as investors grow confident that Beijing is serious about tackling industrial overcapacity. Prices for nine major commodities, including coal, alumina, lithium carbonate and polysilicon, have risen between 10% and 68%, while shares of steelmakers, solar panel producers, and clean energy firms have outperformed the CSI 300 Index.

The rally follows a July 1 policy directive calling for action against “disorderly price competition” and acknowledging overcapacity as a driver of deflation and trade tensions. State media has since amplified the message, warning against “involution,” or destructive competition that erodes profit margins.

Polysilicon prices jumped 68% after reports that China’s two largest producers plan to acquire smaller rivals, signaling possible sector consolidation. Lithium also surged after a northwest China mine was shut down for non-compliant operations, sparking speculation of further closures. Meanwhile, coking coal prices hit daily limits for three consecutive sessions after inspections were ordered at mines to curb excess production.

Beijing’s renewed supply-side reforms echo efforts from a decade ago to reduce output in steel, cement, glass and coal. However, analysts caution that current reforms face greater challenges due to higher private ownership, local versus national policy conflicts, and limited job alternatives for displaced workers.

While the government’s commitment is clear, Morgan Stanley strategist Laura Wang notes that significant profit improvements may take one to two years, with limited capacity cuts expected in the next three to six months.

The latest surge underscores growing investor optimism but also highlights uncertainty over how aggressively Beijing will pursue deeper restructuring across both traditional and emerging industries like electric vehicles and solar energy.