International | Mar 04 2013
-China contemplates pollution reduction
-Most significant impact on coal
-Australia's coal exports most vulnerable
-China also confronts housing crisis
By Eva Brocklehurst
China's new government is serious about reducing pollution and has placed it at the top of the agenda. The polluting of cities by vehicular traffic has long been a headache for developed countries and now China has a blinding headache.
Analysts at Deutsche Bank believe efforts to address the pollution crisis would most likely trigger ambitious policy measures that attempt to reduce car penetration and emissions. The government could embark on building rail and subway infrastructure and there are implications for palladium, steel, iron ore and coal demand. Efforts to reduce car emissions are likely to increase demand for pollution controls on vehicles and this would be bullish for palladium demand.
The analysts note transport and railway infrastructure accounted for 6.2% of Chinese steel consumption last year. Increasing public transport infrastructure may raise this percentage but the analysts suspect it will be offset by curbs to heavy industry. So, don't get excited about more rail production equaling more steel production equaling more iron ore imports. Deutsche Bank is not amending the short to medium term bearish outlook for iron ore on the basis of China's pollution problems.
The DB research team has published a list of proposals that would enable pollution levels to fall back to comparative international levels within a politically acceptable timetable. Cuts in coal fired power generation would give a significant boost to cleaner energies such as gas, nuclear and hydro. Clean energies reached an average of 42% of total energy consumption across the OECD which compares with just 13% in China. This underlines how much ground China has to cover to make targets. On Deutsche Bank's assumptions, coal as a share of energy consumption will drop from the current 68.4% to 52.8% by 2020 as the Chinese economy moves towards more gas and hydro. China's dominant role in world seaborne markets, therefore, implies a potential significant impact on global coal prices.
This would also be significant for Australian producers. Measures would most likely lower thermal coal demand in China and result in imports collapsing, possibly turning the country into a net coal exporter as early as 2015, the analysts maintain. From an international perspective, this would shrink the global seaborne market from a forecast 960mt in 2015 to 790mt, putting it back to 2010 (781mt) levels. China's imports are most heavily dependent on Indonesia (45%) and Australia (30%). Australia, as one of the highest marginal cost producers, would suffer the most from reduced demand. Deutsche Bank estimates that Newcastle benchmark prices would need to fall to at least US$87/tonne in order to force approximately 43 million tonnes of export production out of the market.
Being the global powerhouse, all Chinese policy is watched keenly. ANZ has noted the central government unveiled a new round of property tightening policies Friday evening, earlier than observers expected. A renewed property market boom appears to be concerning authorities. This latest round of policies is trying to make speculation more difficult via taxes and home sellers will have to pay 20% capital gains tax. ANZ believes, ultimately, such a tax policy will just push up housing prices and transaction costs further. As such, the analysts contend the new round of property tightening will only have temporary impact on the prices in the top tier cities. As a side effect, it will encourage buyers to get into new or first housing markets, as the primary housing market transactions are not subject to the business tax and capital gain tax.
ANZ maintains such policies will always have a temporary negative impact on the sentiments of the commodity markets. However, the analysts emphasise the temporary nature of this, because Chinese urbanisation is still happening at a significant rate and long-term demand for housing will not suddenly disappear. BA-Merrill Lynch found the policies not that surprising or radical, noting the announcement also emphasises the need to increase new home and residential land supply.
BA-ML believes that increasing supply is the right solution for the property market, especially given that a real nationwide property tax seems to be unlikely before 2015. Increasing land supply and a speed up of social housing construction has often been mentioned since the government started property tightening, the analysts note. Rather than make predictions, BA-ML believes it is sufficient to say that future policy measures will depend on the interaction between markets, policymakers and developers. Watch this space.
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