China's Five-Year Energy Plan Likely to Have Ramifications For Metals
An interesting article in the New York Times last week looked at Chinese plans to release details this month of its new five-year plan for energy conservation. The issue facing the authorities is more than pollution or the balance of payments, cost of coal, or oil and natural gas imports, as severe as those issues are for the world’s biggest consumer of energy and largest emitter of greenhouse gases. China’s greatest worry is one of national security. China is a net importer of coal, oil and natural gas, making it vulnerable (in Beijing’s eyes) to foreign pressure or disruption of supply. China is Saudi Arabia’s biggest customer for oil and gas, but as the paper points out, all that oil flows through waters controlled by India and the US. Nor is Saudi Arabia (or Iran, the next largest supplier) seen as politically stable today as it was three months ago. Social unrest in the Arab world has made the whole Middle East a riskier supply source than was previously assumed.
In spite of becoming the world’s biggest — and lowest-cost — manufacturer of wind turbines and solar panels, the country is still heavily reliant on imported coal, failing to produce enough domestically to meet its relentlessly rising electricity demand. The trend for rising coal imports is almost certain to continue; even with China’s best efforts at reorganizing the domestic coal industry, they cannot meet rising demand from domestic sources. Russia has been earmarked as a major new source of natural gas and oil just as Europe makes strenuous efforts to reduce its near total reliance on the country for gas supplies. But a major new pipeline from Russia just completed this winter can only meet 3 percent of China’s oil needs, highlighting what a massive investment in infrastructure would be required to even get into double digit percentages. To this must be added natural gas demand, currently meeting just 4 percent of energy needs (the plan is likely to call for this to be doubled by 2015). Again, Russia is the natural supplier, but infrastructure barely exists and multiple pipelines will again be required.
By far the biggest energy source, particularly for electricity generation, is and will remain coal. China consumes some 3.2 billion tons per year and a target of no more than 4 billion tons by 2015 is widely expected to be part of the new plan. That represents just 4.24 percent growth per year for a country that is growing GDP by over 10 percent per year. Even with the growth of renewables and nuclear, that is a tall order and the fear is demand will have to be constrained by allocating electricity to cities and industries. But who decides, with no free market to set prices on the basis of supply and demand? The impact that could have for resource-hungry activities like steel, aluminum and zinc smelting could be profound in the first half of this decade. China may decide it would rather import metals than import energy, reversing the trend of the last decade. Having temporarily idled some of the 20+ million tons of aluminum capacity, could the Chinese really close a significant portion of it permanently?
The world is not short of aluminum. Best-guess figures suggest there could be up to 10 million tons in both visible and invisible stocks; in reality, only China is likely to be able to make inroads into that kind of position, and only then if large parts of the country’s own capacity were closed down. Likewise steel, where China has significant over-capacity and whose demand has been the driver of global iron ore and coking coal prices. If the country became a net importer, global demand for these commodities would not necessarily drop, but the point of consumption would shift and with it the dynamics of the market. There will be a lot more than oil producers looking for the details of China’s new five-year energy plan when they are released, and we may all be feeling the effects for years to come.
Inflation is a problem worldwide, but Food inflation would have a greater impact on the developing markets. I’d be watching this space closely going forward.
The Intrinsic Value: Food Inflation Problem