China - New Pollution Controls

Rodney  Forrest

China is Australia's largest trading partner and this week China announced new pollution controls that have gone largely unnoticed. We have previously written on Livewire about China and the Energy Revolution that is taking place with:

  • "The Top 5 Commodities - The Impending Energy Revoution" (see link), highlighting Robert Friedlands Top 5 commodities for the future (Robert is Chairman of Ivanhoe Mines and Clean Teq (ASX:CLQ); and
  • "The Big Long" (see link) where we showed China has a severe water scarcity problem, potentially runing out of supply by 2030.

In this wire, we will give an update on the changes that took place this week to Pollution controls in China, using data from Thomson Reuters Factbox and the Chinese Ministry of Ecology and Environment Media Releases.

Fristly you may ask well why is Pollution in China so important? Well consider what Emmanuel Macron, the French president, beneath an unaccustomed cerulean sky at the end of a recent visit to Biejing said:

"I’VE never seen Beijing like this"

Source: The Economist Story, "How China cut its air pollution" Feb 2018, in reference to French President, Emmanuel Macron

Consider also these 7 facts on China's pollution problem by the New York Times:

  • According to the Chinese Ministry of Health, industrial pollution has made cancer China’s leading cause of death;
  • Every year, ambient air pollution alone killed hundreds of thousands of citizens;
  • 500 million people in China are without safe and clean drinking water;
  • Only 1% of the country’s 560 million city dwellers breathe air considered safe;
  • Lead poisoning or other types of local pollution continue to kill many Chinese children;
  • A large section of the ocean is without marine life because of massive algal blooms caused by the high nutrients in the water; and
  • The pollution has spread internationally: sulfur dioxide and nitrogen oxides fall as acid rain on Seoul, South Korea, and Tokyo; and according to the Journal of Geophysical Research, the pollution even reaches Los Angeles in the USA.

For context a renewed focus on Pollution controls started by Chinese President Xi Jinpinig in March 2018 at the National People’s Congress, where in a historic moment, the Chinese Government formed a new Ministry, the Ministry of Ecology and Environment. Coming out of that Congress Chinese Premier Li Keqiang said:

  • In 2018, China would target to cut energy consumption per unit of GDP by 3%;
  • Would close inefficient coal and steel plants;
  • Will increase China’s electric car fleet;
  • Ban waste imports;
  • Will cut sulphur dioxide and nitrogen dioxide emissions by 3%; and
  • Allocate a historic 1 trillion-yuan investment in water management.

China is currently drawing up a comprehensive new 2018-2020 action plan to further improve air quality, yet on Tuesday the Chinese Ministry of Ecology and Environment, referenced Chinese regions whom pledged to beef up anti-pollution curbs. Below is a summary of the targets and measures proposed by the major Chinese provinces this week:

Shandong

A coastal province with a population of 99m in North East China, with over 1,900 towns. It is the biggest industrial producer in China.

  • Aims to cut concentrations of hazardous airborne particles known as PM2.5 to 49 micrograms per cubic metre by 2020;
  • Will cut 3.55 million tonnes per year (tpy) of crude steel capacity and 600,000 tpy of pig iron capacity in 2018;
  • Still needs to close 7.1 million of ironmaking capacity and 5.94 million tonnes of steelmaking capacity that Rizhao Steel Holding Group was asked to cut in 2015;
  • Will promote withdrawal of excess and outdated capacity in the aluminium, chemical, cement, steel and other high-polluting and high coal-consuming industries;
  • Inspections and large-scale overhauls of outdated coal-fired power and illegal coal-fired power generation units will continue until June end; and
  • By end-June, it will develop plan to reduce coal consumption by 2020.

Zhejiang

A province with a population of 56m in East China, with over 1,570 towns. Its main manufacturing sectors are construction materials and electromechincal industries.

  • Will reduce heavy metal pollutants in key industries by more than 10 percent from 2013 levels by 2020; and
  • Building 20 new waste disposal facilities by end-2018, each with a capacity of at least 10,000 tonnes per day, to ease the shortage of garbage disposal capacity.

Xinjiang

A province with a population of 22m in North West China, with over 1,000 towns. Traditionally agricultural region, yet produces coal, natural gas and crude oil.

  • By 2020, PM2.5 levels in the capital Urumqi will have fallen by 25 percent from 2017 levels. Percentage of days with heavy and worse pollution will fall by 15 percent from 2017;
  • Will strictly control consumption of thermal coal during winter time, and cut production of thermal power, cement, steel, coal chemicals in winter;
  • By 2020, emissions of sulphur dioxide and nitrogen oxide will fall 3 percent from 2015 levels in areas where pollution is severe;
  • Will continue to crack down on use of film residue in farmland and restore polluted soil in oil and mine fields; and
  • Will demolish small coal-fired thermal power plants that the state has ordered to shut by end-2019 and ban new small to medium-sized coal plants in Duha, Huaidong and Yili districts.

Jilin

A province with a population of 27m in North East China, with over 1,000 towns. Concentrated on automobiles, train carriages, and iron alloy industries.

  • By 2020, PM2.5 levels will drop by at least 18 percent from 2015 levels and percentage of coal consumption in overall energy consumption will drop to below 63 percent;
  • By 2020, will eliminate small coal-powered boilers in counties and cities, and animal waste treatment rates will reach more than 75 percent; and
  • Will strictly implement measures to cut and stop heavy manufacturing on days with heavy pollution.

Sichuan

A province with a population of 81m in mid China, with over 5,000 towns. It is a major agricultural production base and is rich in mineral resources.

  • Will shut 4.2 million tpy of crude steel capacity, 5 million tpy of cement, 34 million tpy of coal and 1.12 gigawatts of coal-fired power capacity by end-2020; and
  • Government will close Dazhou Steel and Iron Corp's current factory and move it to a suburban area as soon as possible.

When brought together these changes are quite profound for the Chinese economy. It is important to note we have seen already since March 2018, that more than 2,000 government and state enterprise officials in 15 regions had been held to account as a result of pollution inspections, with 22 now facing criminal charges.

The top legislator of China, Li Zhanshu this week also called for full and effective implementation of the Air Pollution Control Law, during his inspections. Li, is also the chairman of the National People's Congress Standing Committee and a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee, he said:

"the weapon of law should be used to safeguard the blue sky."

When inspecting local enterprises, Li urged them to speed up transformation and upgrading, and pursue green development. Li said

Pollution must be addressed from the source... enterprises failing to meet environmental protection standards would be rectified or shut down.

Li ending up calling for major adjustment to the structure of the economy, industry, energy and transportation, and urged people's congresses at all levels to perform their functions, perfect the law and local regulations, and strengthen supervision.

All of this directly follows on from Chinese President Xi Jinping whom on May 19, 2018, Xi said China must abide by the following principles to push forward ecological civilization in a new era. He said:

  • We must ensure harmony between human and nature. China must stick to the policy of putting conservation and protection first, and mainly relying on the natural recovery of the environment;
  • Lucid waters and lush mountains are invaluable assets. China must pursue the vision of innovative, coordinated, green and open development that is for everyone;
  • Sound ecological environment is the most inclusive benefits to people's wellbeing. Priority should be given to addressing prominent environmental problems that are harmful to people's health;
  • Mountains, rivers, forests, farmlands, lakes, and grasslands are a life community. The building of ecological civilization must take all factors into consideration with good overall plans and multiple measures;
  • Protecting the environment requires the best institutional arrangements and the strictest rule of law. Institutional innovations must be accelerated and enforcement of laws and regulations must be strengthened; and
  • Working together on global ecological civilization construction and getting deeply involved in global environmental governance to come up with a worldwide solution for environmental protection and sustainable development, while guiding international cooperation to tackle climate change.

Whether this is all achieved, is yet to be seen. After all China is the worlds top polluter and President Xi Jinpinig has made pollution controls a top pillar of his presidency, since 2014. President Xi Jinping has pledged to build a prosperous society by 2020 and in a clear signal of the importance of safeguarding the environment, the Communist Party of China has suggested amending the Constitution to expand the role of the State Council, or China's Cabinet, to also include ecological advancement. China is however well on the way with the world's biggest consumer of coal, already having cut its consumption of the fossil fuel by 8.1%, and increased its clean energy production by 6.3% since 2014.

However for businesses in Australia with Chinese relationships, keeping abreast of what Chinas priorities are with pollution, given the interdependies to many industries are all too important. As for investors, the same should be said. In our opinion companies who are developing Commodities for the future or working towards supporting a green future in China, are where we see the potential next Third Industrial Revolution is going to take place. After all Change is a constant and consider these two quotes from the Investment Masters.

"Investors have to be alert to changes in the market that could change their original assumptions" Leon Levy

"Those who cannot adjust to change will be swept aside by it. Those who recognize change and react accordingly will benefit" Jim Rogers

To know more on the Third Industrial Revolution it can be found at the bottom of the livewire story we did on the Top 5 Commodities (see link).

Thank you for reading.

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Disclaimer - The information contained is general information only. Any research should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. No person, persons or organization should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action.


Rodney  Forrest

Forrest Equities conducts sell side research for Investment Banks. Rodney has 15 years Finance experience with postgraduate degrees in Economics/Econometrics, Finance, and Taxation Law.

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Patrick Fresne

Might I suggest the inclusion if one other rather unloved commodity, lead, in the keyword tags at the end of the article?. As you noted in the article, lead contaminated soil is a serious problem in China, and as such the lead producing industry has been in the sights of the Chinese government as part of their crackdown on polluting industries. China has been a major producer of lead, supplying over third of the world's lead supply for many years, so the anti-pollution campaign in that country likely has significant implications for the lead price in the years ahead.

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