China growth plans to slow commodities - Financial Times

By Leslie Hook in Beijing
Published: March 8 2011 18:05 | Last updated: March 8 2011 18:05

It is the world’s largest consumer of raw materials and has been the single biggest driver of the commodities bull run. So China’s latest five-year plan, the economic blueprint that will dictate future demand, will be nothing short of market-moving.

The policies that are being hammered out this week in the Great Hall of the People in Beijing will set the tone for China’s consumption of everything from iron ore to copper and cotton. At the heart of the plan, which will cover 2011-2015, is a shift towards cleaner, slower growth. But analysts believe this is unlikely to translate into less demand for raw materials.

“Commodities demand over the next five years will remain robust,” says Graeme Train, analyst at Macquarie. “The key difference is that growth in that demand will slow quite considerably.” He expects steel demand growth will fall to 6-7 per cent over the next five years, after averaging around 17 per cent during the past 10 years. “Iron ore prices should stay at elevated levels over the next five years,” he says.

At first glance, many of Beijing’s new targets might seem to damp demand for raw materials. In his state of the union address, Premier Wen Jiabao announced that by 2015 China would cut fossil fuel use to 88.6 per cent of energy supply, reduce energy consumption relative to gross domestic product by 16 per cent and cut carbon emissions relative to GDP by 17 per cent.

Mr Wen also spoke of extending a nationwide mining and resources tax, and a potential cap-and-trade pollution tax. He cut the guideline GDP target from 7.5 per cent to 7 per cent.

Those policies, though, are unlikely to put the brakes on China’s demand for commodities in the near term. For iron ore, a key ingredient in producing steel, demand from China will only continue to grow, analysts say. The government plans to build 36m subsidised apartments during the next five years, part of a push to bring affordable housing into the cities that will fuel demand for construction materials such as steel and cement.

“It is clear that there will be a lot of construction over the next five years, whether it is public housing, which is very significant, or the continued roll out of infrastructure in the middle provinces,” says Ric Deverell, global head of commodities research for Credit Suisse. “It is unambiguous that you will have a lot of demand for steel and construction materials.”

Analysts believe these factors will support iron ore prices over the next five years. Ian Roper, of CLSA, forecasts prices will stay around $145 per tonne this year, falling to $120 per tonne next year as more supply comes online globally.

In coal, the five-year plan could push up imports, analysts say. “China’s coal industry is struggling to be competitive,” says Peter Hickson, global strategist for basic materials at UBS, pointing out that new domestic taxes and a focus on energy efficiency could make coal mining more expensive. “There’s a lot of opportunity here for importers of coal and iron ore.”

China is the world’s second-largest net importer of thermal coal, used in power stations, and its demand has helped keep coal prices at their current level of $130 per tonne.

In energy, China’s five-year plan could have an even bigger impact, as the government makes a push into natural gas and non-fossil fuel energy. According to the National Energy Administration’s targets, China will import 90bn cu m of gas a year by 2015 as well as producing 170bn cu m domestically. Although China has been a minor importer of natural gas in the past, that could soon change.

Last year China’s imports of liquefied natural gas jumped 69 per cent to reach 9.4m tonnes. Already, state energy giants such as Sinopec and Cnooc are gearing up for LNG imports with long-term contracts in Australia and the Middle East.

“The domestic market has been fed with very cheap domestic gas for the past few years, and we are now switching to a market that is going to be fed by a significant quantity of imports,” says Bradley Way, the Beijing-based regional head of energy for BNP Paribas. He adds that fuel pricing policy will be key to how quickly Chinese companies embrace the production of domestic shale gas, which is thought to be in plentiful supply but has yet to be commercially produced on a large scale.

China’s energy policies will also boost demand for uranium. According to Qian Zhimin, a deputy at the National Energy Administration, China could be the world’s largest importer of uranium by 2030.

Mr Qian told local media that nuclear power could surpass the state-set targets to provide as much as 7-8 per cent of primary power by 2020. The bull run may last a while yet.