The Chinese clean-up commodity opportunity

China’s government is responding to political pressure to tackle the ongoing pollution crisis by introducing new measures to improve the environment, which look set to impact the economy.

Outgoing premier Wen Jiabao stressed the need for ‘concrete action’ at this year’s session of the National People’s Congress where the once a decade leadership transition will take place.

The budget published on Tuesday included the intention to invest in a range of projects to improve quality of life, including environmental protection, reducing carbon emissions and energy conservation.

Pollution levels were so high this winter that Beijing residents were advised to stay indoors after the city was shrouded in smog.

Visibility was less than 100 metres in some areas of eastern China according to the state news agency and a number of flights had to be cancelled in several cities.

‘A recent report showed that the air quality in Beijing was worse than an airport smoking lounge,’ said Daniel Tubbs, head of emerging markets at Mirabaud Asset Management. 

‘They have announced that they are going to introduce air pollution control measures, but it is a short window to clean up industry and it begs the question of how they enforce it - particularly as 70% of China’s energy production comes from coal. Before the Olympics they did force some factories to shut down and they have done it since, which is a risk to investors investing in these companies.’

New measures to tackle the pollution crisis are unlikely to be introduced until 2015 when the next five-year plan begins.

The current five-year plan included a target to increase the non-fossil fuel share of primary energy consumption to 11.4%. Reducing emissions is likely to require a reduction in Chinese coal consumption, and Deutsche Bank expects coal’s share of the country’s energy mix to decline from 68.4% to 52.8% by 2020 as cleaner technologies, such as gas and hydroelectric power, are adopted.

Commenting on the likely government response to the pollution crisis, Michael Lewis, managing director and head of commodities research for Deutsche Bank, said: ‘Efforts to address the country’s pollution crisis would also most likely trigger ambitious policy measures that attempt to reduce car penetration and emissions as well as encourage the government to embark on an aggressive programme of rail and subway infrastructure builds with potential implications for increased palladium, steel and iron ore demand.’