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China Environmental Policy and how it is affecting commodity prices

A comment piece researched and written for a client company website and posted on LinkedIn.

Chinese cargo containers in the port

Background

Early in January the monthly review of commodity price movement was printed – not a riveting read but a vital one in the premium business.

This edition is the fun one – it is the one that shows how commodities have increased or decreased over the whole of 2016.

This year the movements were stark.

There was next to no decline or static price maintenance, it was nearly all drastic price increases.

Some examples…

  • Tin +58%
  • Plastics – from 6% to 156% depending on the type
  • Cardboard +39%
  • Cotton +31%

The China Effect

Whilst there is a never simple, or single, explanations for such trends, there is a powerful force within China that is definitely having a significant influence – the enforcement of strong environmental policies by the Chinese Government.

China unveiled its 13th Five-Year Plan in September 2016, which will guide the country’s economic and social development through to 2020.

A key element of this plan is that environmental stewardship is an increasingly integral component of China’s development.

Where once it was cheaper to pollute than clean-up, it is now the case that strong official action will be used to tackle industry pollution sector by sector.

ASL have experienced this policy first hand.

We were producing a complex item that was made up of multiple metals in an audited factory in the Guandong region.

Just before Chinese New Year all metal factories in this region were closed, for a month, as Government officials reviewed every factory, with no notice, no matter their audit status.

They then shut down those factories that did not meet the new pollution guidelines with immediate effect.

Policy Targets

The 13th Five Year Plan targets:

  • A reduction of water consumption by 35% by 2020 – compared with 2013
  • Total consumption of primary energy in 2020 of less than 5 billion tons of standard coal
  • A reduction in energy consumption per unit of GDP by 15% by 2020 – compared with 2015
  • A reduction of carbon dioxide emissions per unit of GDP by 40-45% by 2020 – compared with 2015

Pollution-intensive enterprises will face immediate closure or a massive pollution control charge, enforced by national, provincial or municipal governments.

Key initiatives put in place to reach the targets include:

  • Setting and enforcing standards for carbon/waste emissions, clean energy, along with water/soil pollution
  • environmental credit record for companies
  • Stronger monitoring of and immediate closure for polluting companies
  • “Green” tax incentives covering resource extraction, consumption and pollutant emission
  • Stronger import and export controls for pollutant elements
  • Promotion of green certification systems and green government procurement policies

What this policy means for commodity prices

The new Chinese Environmental policies effect on commodity prices has been immediate and drastic.

At the beginning of this article there was information showing 2016 price increases for 4 commodities – tin, plastics, cardboard and cotton.

Taking one of these commodities, cardboard, we can investigate just how drastic.

According to China’s Customsin October 2016, China imported 192.54 million tons of waste paper and this was a 27.38% decrease from September.

 Several shipments of waste paper and cardboard from overseas were detained at customs due to the greater enforcement of regulations on imported waste.

For example, in September, 667 tons of waste paper from the US were found to include PVC infusion bags and other medical waste.

The policies have caused an immediate drop in overseas supply.

Like the metal factories in Guandong, China’s domestic paper and cardboard waste market has recently come under increased scrutiny.

In addition, from October 20th, 2016, China’s Ministry of Environmental Protection began inspecting over 20 provincescracking down on paper and cardboard projects that violated the law — specifically regarding significant pollution created during production.

In the end, many small- and medium-sized paper and cardboard factories that failed to pass the Environmental Impact Assessment (EIA) were forced to shut down, resulting in a major drop in the domestic supply of reprocessed paper and cardboard.

Due to these two policies cutting down supply, entrepreneurs have seen an opportunity and stockpiled paper and cardboard to boost the price they can get at a later date.

Combine these factors with events such as China’s Singles Day, (on November 11th every year,) where The National Post Office delivers over 350 million packages in a single day and you have a “perfect storm” of lower supply and higher demand!

The result?

The combination of drops in imported/domestic supply, massive demand peaks and stockpiling means violent price changes.

From October to November 2016 alone, the price of cardboard jumped 33%, from 1210 RMB per ton to 1610 RMB per ton — and at one point, it increased at a rate of 150 RMB per ton per day.

ASL comment

ASL supports all environmental initiatives, as we do for social compliance and quality assurance initiatives.

We are proud members of Sedex and Ecovadis global schemes and seek to drive their agendas with all our clients.

The increased stringent application of stronger environmental laws from the end of 2016 in China has caused immediate price hikes.

In time these rises will become controlled and could drop as new players enter the supply chain, filling the void left by old suppliers.

In the short term, through careful procurement practices such as cost avoidance or best value methodologies, product design, rationalisation and consolidation, ASL will seek to reduce the effect of price fluctuations as much as possible for our clients.

In the longer term we will partner with the new generation of environmentally friendly suppliers to ensure the best solutions for both China and our clients.

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