COMMENT: Six areas where China’s new policies will affect metals

China’s new leaders for the next decade are finally in place: president Xi Jinping and premier Li Keqiang were installed at the close of a major political gathering in Beijing which ended on Sunday March 17.

They inherit a challenging inbox: corruption, pollution, slowing growth, and the task of adjusting China’s still impressive but creaking economic model.

China’s explosive growth over the past 20 years has transformed the global metals industry, from mining in Africa to the ownership of the London Metal Exchange.

Here are six areas of domestic policy where the new leaders’ decisions will be of critical importance for metals in the coming years.

‘Beautiful China’: the environment
Suffocating smog in Beijing, dead pigs in the river near Shanghai, food scare after food scare. The new government is under intense pressure to rejig the balance between economic growth and public health.

For metal producers, this could mean tighter controls on waste and emissions, more stringent environmental audits, a renewed drive to restrict the most energy-inefficient operations in sectors like steel and aluminium. Ultimately: higher marginal costs for miners and heavy industry.

Economic reform
The need for China to move from an economy heavily dependent on infrastructure investment and exports to one driven more by domestic consumption was echoed in speeches from both the departing and incoming top leaders during the parliamentary gatherings.

The investment-led model has helped prop up the price of copper and iron ore while the rest of the world stagnates. But the five-year plan for 2011-2015 focuses on boosting household income, raising consumption and expanding the service sector.

Financial reform
Metals investors will be eyeing a swathe of potential reforms that will stimulate cross-border trade: relaxation of rules restricting foreign participation on domestic exchanges, easing of capital controls, and allowing Chinese institutions more freedom to operate overseas.

The Shanghai Futures Exchange used the parliamentary meetings to call for reforms aimed at helping its flagship crude oil contract planned for this year.

This included the suggestion that some investors in the contract should be exempt from currency exchange restrictions.

The extent of the SHFE’s success developing and launching that contract will perhaps be seen as an early indicator of the real impetus behind opening up the futures market.

Energy liberalisation
China’s explosive growth has been helped by cheap energy, often in the form of subsidised or centrally-priced oil, gas or electricity. But pricing reform is on its way, gradually.

Market-based energy prices in China would please China’s critics, such as those in the US steel industry who see cheap fuel as a hidden support to China’s disruptive steel exports.

Urbanisation
The growth of China’s cities has helped sustain a construction boom. But there is more focus now on improving the quality of existing cities and ensuring that the gap between haves and have-nots does not grow.
 
Urbanisation will continue, but its nature could change the pattern of demand for metal.

‘Wading into the water’
One of the themes running through all of this is that reforms will challenge those who benefit from the status quo, including members of the political elite.

Powerful mayors and property developers may resist new approaches to urbanisation, state-owned banks may baulk at some financial reforms and heavy industries will struggle to be weaned off energy subsidies or cheap financing.

Reform will demand concentrated and coordinated political will to transfer economic power away from interest groups embedded in the Communist Party.

Li acknowledged as much himself on his appointment. “In pursing reform, we now have to navigate uncharted waters. We may also have to confront some protracted problems. This is because we will have to shake up vested interests,” he said.

Political stability in China has underpinned the commodities boom of the early 21st century. The continuation of that growth story may depend on the capacity of the government to push reform and continue China’s transformation.

editorial@metalbulletinasia.com