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CHINESE AIR POLLUTION AND ITS IMPACT ON COMMODITIES
While the problem of Chinese air pollution has populated the headlines for years, the condition at the end of 2016 and in early 2017 has become so severe that the Chinese government is finally taking concrete action.
While the problem of Chinese air pollution has populated the headlines for years, the condition at the end of 2016 and in early 2017 has become so severe that the Chinese government is finally taking concrete action. Many cities in northern China have recently battled their longest periods of severe air pollution ever, and political and economic pressure is rising that might force the government to correct the situation. Ultrafine particulates labeled as PM2.5 in China have reached twice the level considered hazardous by the US Environmental Protection Agency. China isn’t the only country facing severe problems, as India last year saw a New Delhi court give the national government three days to live up to its new air pollution guidelines.
Foreign expatriates working in China are reportedly fleeing, while significant numbers of Chinese residents in the severely-impacted northern half of the country are moving south. As many as 32 cities were under a red alert that forced the closing of schools and factories. Half of the cars in Beijing have been taken off the road periodically owing to the crisis. With these red alert days affecting economic activity and Chinese economic growth by idling factories and reducing daily commerce in an already vulnerable economy, it is not surprising to see the government take aggressive steps to clean the air.
At least initially, the most directly-impacted commodity markets will be coal, natural gas, the platinum group metals (PGMs) and ethanol. Coal burning for electricity generation, cooking and heating is the primary contributor to air pollution, followed by auto emissions. Natural gas, ethanol and platinum group metals appear to be part of the initial solution.
CHINA ISN’T THE ONLY COUNTRY FACING SEVERE PROBLEMS, AS INDIA LAST YEAR SAW A NEW DELHI COURT GIVE THE NATIONAL GOVERNMENT THREE DAYS TO LIVE UP TO ITS NEW AIR POLLUTION GUIDELINES.
SWITCHING FROM COAL TO NATURAL GAS About 70% of China’s total energy consumption and nearly 80% of its total energy production comes from coal, and the country has already implemented policy directives to reduce the usage of coal for electricity generation. China has by now closed 1,000 coal mines, and it has disallowed any new mines until 2019. That makes it clear that it is the government’s goal to reduce coal’s share of power generation to 55% by 2020. Reducing coal use will require other feedstock alternatives for electrical generation, and that should largely fall to natural gas.
China’s natural gas consumption from January through November 2016 was up more than 15% from the same period in 2015. It is possible that dependence on imported natural gas could rise significantly as internal supply is lacking. Prior to the most recent pollution crisis, China was forecast to gradually increase its reliance on renewables, but the urgency of this latest crisis may force a move more quickly away from coal towards natural gas, as that would be the quickest option and most cost-effective method.
A 2016 International Energy Association report suggested that global coal demand usage stalled after ten years of 4% annual growth. While these consumption decreases might be partly the result of slower economic activity, there is clear evidence of a shift away from coal towards natural gas for electricity generation in Europe and America, which highlights the potential for an increase in Chinese demand. All things considered, current fundamentals make the outlook for coal prices dismal, while the outlook for natural gas prices looks impressive.
28 | ADMISI - The Ghost In The Machine | January/February 2017
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