China’s Environmental Initiatives and the Impact on Commodities

September 25, 2018//-China’s environmental initiatives are rippling through the global commodities market.

We sat down with Goldman Sachs Research’s Trina Chen who explained why China’s latest policies were a key topic of conversation among the company executives, industry leaders and investors who convened at Goldman Sachs’ Asia Commodities Conference, held recently for the first time in Shenzhen.

Trina, can you explain the background behind China’s environmental initiatives and how they are connected to commodity prices?

Trina Chen: China’s government started to crack down on pollution around 2013, when Beijing experienced some of the worst air pollution in decades. The public outcry that followed spurred the government, led by President Xi, to impose strict controls on air pollution through its first “air act,” which included quantifiable targets for air quality improvement.

This effort, combined with supply-side reforms, led to cuts on capacity across the commodities sector, including steel, coal and basic metals. As a result, commodity producers — which have long operated with excess capacity — found themselves operating instead with capacity constraints, leading to tighter supplies and higher prices.

Do you expect these effects to last?

TC: We believe these higher prices are more sustainable given policymakers’ long-term focus on the environment. Take, for example, the Chinese steel industry. This is a sector that has typically been saddled with excess capacity, producing more steel and other goods than is otherwise needed.

Not only has the industry eliminated most of the excess capacity due to the government measures, the steel factories are running at close to 100% capacity and Chinese steel exports are at almost half the levels they were just a few years ago.

The changes we’re seeing on the supply side as a result of these initiatives are unprecedented in terms of both scale and sustainability, and are clearly impacting the broader Asia-Pacific region and the global commodities market. Since we’re in unknown territory, it’s a subject we’re getting the most client inquiries on.

Can you talk about China’s efforts to develop clean energy?

TC: The investment in clean energy is clearly one of China’s major government initiatives and a way to reduce the country’s dependency on oil, coal and other fossil fuels.

Electric vehicle production is experiencing robust growth. Year-to-date output in EVs, for example, grew 75% year-over-year, although that growth is still off a small base. It’s likely to be another 10 years before EVs become cost competitive with other automobiles and represent a meaningful part of the market.

That said, the demand for EVs is starting to benefit pockets of the commodity sector, such as cobalt, lithium, nickel and copper, that make up EV-related batteries.

Goldman Sachs

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