Citi Says China Going Green Will Hurt Industrial Commodities

  • Expects carbon trading program by 2017 for steel, electricity
  • Five-year plan due after Communist Party Plenum in October

China’s demand for industrial commodities will probably be hurt as the biggest energy and metals user intensifies efforts to rein in pollution, according to Citigroup Inc.

The country will focus on the environment as never before in its forthcoming 13th Five-Year Plan and may start a carbon trading program next year or the year after, Citigroup said in a report on Friday. Costs for energy-intensive industries will increase, with steel and electricity likely to be the first to implement the scheme, the bank said.

Now the world’s biggest carbon emitter, China is moving to address the environmental damage that’s been a byproduct of its breakneck economic expansion. Xi Jinping’s first five-year plan since becoming president in March 2013 will chart the path for the nation’s further development. It’s expected to be delivered at the time of the Communist Party Plenum in October.

“Environmental initiatives are likely to be among the most emphasized portions of the FYP and are likely to carry some of the most aggressive targets,” analysts including Ivan Szpakowski wrote, referring to the plan. “The scheme is likely to increase costs for emissions heavy industries including coal power plants, metals refineries, oil and petrochemical plants.”

Commodities Tumble

Policy makers are seeking to shift the economy away from investment-led growth to one driven by consumption, prompting a slowdown in construction. A measure of returns from commodities sank last month to its lowest since 1999 on concern that a slowing China will exacerbate supply gluts.

China’s targets of about 50 gigawatts a year of renewable and natural gas capacity additions will displace more than 300 million metric tons a year of coal demand by 2020, Citigroup said. A push for increased new energy vehicle usage will boost copper consumption, while gasoline demand, and to a lesser extent diesel and natural gas, are likely to suffer, the bank said.

Real estate will also feature prominently in the plan given its importance to the Chinese economy, the analysts wrote. The government’s withdrawal from social housing construction will curb the use of metals such as steel, copper, aluminum and zinc, according to Citigroup. 

It’s not all bad news for industrial commodities. The building of roads and railways linking China to markets across Asia, Africa, the Middle East and Europe under the “One Belt, One Road” initiative will lift demand in the medium and longer term given the massive transportation and energy infrastructure needs in some countries, Citigroup said.

The bank also expects China to step up efforts to phase out its stockpiling system, representing a shift in dynamics for cotton, sugar, soybeans and corn markets. The government, which acts as a buyer of last resort for Chinese farmers by providing a price floor and building inventories during times of oversupply, is likely to try and cap subsidies, the analysts said.

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