Happy New Year from Hong Kong, where most things are still closed. The city, which was one of the first outside of mainland China to react to the initial outbreak, has now lived with the threat of the virus for almost a year.

The focus of today’s main piece tracks back to the mainland and looks at how Covid-19 has affected Beijing’s dominance of the global steel industry.

Meanwhile, Policy watch focuses on Erika Solomon’s and Guy Chazan’s dissection of how Germany’s relationship with China could be redrawn in the post-Merkel era.

When news of a virus in Wuhan, China, first swept the world in early 2020, few would have imagined that the ensuing crisis would increase rather than stymie the country’s dominance of core industries.

One sector that lays bare that process particularly clearly is steel.

In the period to the end of November, China’s share of global production was 57.5 per cent, according to a MySteel analysis of data from the World Steel Association. That compares with 53.3 per cent in all of 2019.

Production in China was up over that period, compared with a year earlier, to almost 1bn tonnes, while total global production fell. In China, new reported cases of the virus slowed to a trickle in the second half of the year, while the pandemic continued to (and continues to) rage in other major economies.

China’s economic response to the pandemic — which involved issuance of special bonds designed to fund infrastructure projects, in an echo of its post-financial crisis stimulus strategy — ramped up the need for steel. Demand was also bolstered by a construction boom as house prices soared.

This has had major implications in the commodities market. While certain commodities, most notably crude oil, have collapsed in price on the back of the pandemic, the price of iron ore — a crucial ingredient in steelmaking — has repeatedly hit new highs.

Last month, it hit its most expensive level in seven years, boosted in part by demand from China’s buoyant industry.

Australia, which has become embroiled in an increasingly ill-tempered geopolitical spat with China, nonetheless shipped enormous quantities of iron ore over the past year. Its economy and big miners based in the country, along with other producers such as Brazil’s Vale, have benefited directly from that trade.

Steel production in China is still expected to remain high this year. S&P Global Platts estimates that in 2021, crude output will hit 1,068m tonnes. It also expects Chinese exports of finished steel products to increase.

This would be another example of an early recovery in China spilling over to other countries. As well as steel production, China ramped up its share of overall global trade last year, with exports rising more than 20 per cent year on year in November.

But Platts expects steel exports to increase thanks to both recovering demand abroad and slowing domestic property demand in China, especially in the housing sector, where China’s government has recently taken measures to control prices. It has already unveiled measures designed to constrain leverage across its biggest developers and over recent weeks announced new limits on banking lending, both to developers and via the mortgage market.

China’s recovery is expected to enter a phase driven by a full recovery in household consumption and away from its heavy reliance on industry. Official data has so far showed retail sales growth lagging behind industrial production, which in November exceeded the rate seen across most of 2019.

So while many of the conditions that bolstered the steel supply chain in 2020 may remain in place, there are also signs of China’s industrial strategy giving way to a different economic approach, though the bigger picture will depend on a global recovery as well as what happens in China.

And while steel output in China is expected to remain high, it may not necessarily surpass last year’s level. The country’s official news agency Xinhua reported in late December that Xiao Yaqing, minister of industry and information technology, said that China would “resolutely cut the output of crude steel and ensure it falls year on year in 2021”.

Rather than the short-term pressures of coronavirus, the announcement was linked to China’s longer-term plans to reduce carbon output. President Xi Jinping last year pledged to make the country carbon neutral by 2060. When the effects of the former have faded, the latter could have even greater — and more unpredictable — consequences for commodities trade.

Alan Beattie kicked off the week looking at how the EU’s new investment treaty with China presented Beijing with an opportunity to divide and rule. As Alan flagged, the treaty came at Berlin’s urging. And the closeness of the relationship between Beijing and Berlin is the focus of a long read by our Berlin bureau team, Erika Solomon and Guy Chazan.

Much of that closeness is built on trade links between the world’s two most renowned manufacturing powerhouses. For anyone after a sense of how much Chinese exports matter to Germany, here’s a chart from the piece:

Line chart of German goods exports to China as a % of total showing The Chinese market has become increasingly important for Germany

As one of our readers noted, China is the third-largest export market for Germany after the US and France. Ever the pragmatist, Chancellor Angela Merkel has therefore taken a far more lenient stance on national security concerns than, say, the US or the UK.

But the article questions whether trade links will continues to override those concerns after Merkel steps down. As the writers point out, the current chancellor personifies old ideals of western rapprochement with China — the principle that ever-deepening economic ties with the west would encourage political change in Beijing, and a shift to liberalism and western values. Others, however, are far more sceptical, including her potential successor Friedrich Merz. Lawmakers from the Green party, which could well form part of any new governing coalition, have also been vocal about human rights abuses.

Elections are set for September. Watch this space.