Metals rally needs more than China’s anti-pollution rhetoric
After years of rapid expansion that stoked tensions with China’s trading partners, Hongqiao was this year ordered to close 2.7m tonnes of annual capacity.
The shutdowns are part of President Xi Jinping’s plans to cut excess capacity and clean up the environment after years of rapid expansion that has made China one of the most polluted countries in the world.
Environmental inspectors have been sent across the country to fine and shut down polluting plants guided by Xi’s slogan that “green mountains and clear water are equal to mountains of gold and silver”.
Investors in the global metals market have taken Mr Xi’s ambitions to curb pollution-generating production seriously. Zinc, a metal used to galvanise steel, has climbed 22 per cent this year and is trading at its highest levels in a decade at more than $3,000 a tonne. Aluminium has advanced 25 per cent to a four-year high.
That, in turn, has helped the fortunes of China’s largest state-owned producers as well as global miners. Mining shares have returned 26 per cent in 2017, the second year of double-digit percentage increases following three years of losses, according to the Bloomberg World Mining Index.
The prospect of less Chinese supply has not been the only stimulant for metals this year. Dollar weakness has helped, as has the resilience of many major economies. Global growth will hit 3.5 per cent this year and 3.6 per cent in 2018, according to the latest forecasts from the International Monetary Fund.
However, despite Mr Xi’s forceful rhetoric on cutting pollution, doubts are growing that the government will be able to deliver the scale of cuts that the rally in metals has anticipated.
The picture so far this year for Chinese aluminium production supports this view. Output has climbed 17 per cent in the first eight months of the year, according to CRU.
China’s refined zinc production slipped just 1.2 per cent in the first half of the year even though smelters were shut down, according to ICBC Standard Bank, a unit of China’s largest bank.
However, the ambition of authorities in Beijing faces other obstacles. While the Chinese media is trumping the environmental campaign as the Communist Party gears up for its 19th Party Congress that starts on Oct 18, much will depend on whether the central government can enforce its will against local governments, where mining and smelting industries provide jobs and stability.
/Source: The Financial Times/
Sept. 1, 2017