Beruflich Dokumente
Kultur Dokumente
May 2018
Trade frictions
US and China compete for economic space
Leaner industries
Capacity cuts do not mean less production
Cultural reach
The Belt and Road Initiative will change the geopolitical map of Eurasia
Gravitational pull
China will need more oil and gas to grow
www.platts.com
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Contents
May 2018 Foreword..............................................................................................................................4
China to marry fast growth with a greener future
Editors Executive summary.............................................................................................................6
Paul Bartholomew Snapshot – China in an era of change
Chris Midgley, Claire Wang, Zhuwei Wang Alive and kicking: China hydrocarbon demand...................................................................20
Rising demand for hydrocarbons appears inescapable
and Oceana Zhou
US and China: energy interdependence.............................................................................26
China revealed as the logical destination for US shale oil exports
Design and Production
Martina Klančišar Changing trade flows.........................................................................................................30
China’s crude supplies are increasingly diverse
Digital Content Leader Video: Platts cFlow
Watch a video showcasing the vessel-tracking capabilities
Mark Pengelly
of Platts cFlow
Content Project Manager
Clearer skies: China’s New Energy Economy......................................................................32
Carrie Bharucha China constructs a new economy within the old
S&P Global Platts Infographic: Hydrocarbons vs The New Energy Economy...................................................36
20 Canada Square, 9th Floor
Two birds, one stone: China’s E10 mandate........................................................................40
London, E14 5LH, UK National E10 mandate poses big questions for Chinese refiners
Waste matters...................................................................................................................44
President
China’s environmental policies send waves through global markets
Martin Fraenkel
China’s Belt and Road Initiative.........................................................................................46
Chief Financial Officer The BRI will fundamentally alter the geopolitical map of Eurasia
Hywel Thomas Video: Beyond the Belt and Road
Watch Paul Gruenwald discussing the economic and political impact
Chief Operating Officer
of China’s policy approach
Sue Avinir
China’s commodity exchanges...........................................................................................50
Vice President, Global Head of Metals and China seeks an equal seat at the high table of finance
Agriculture and Co-Head of Content Finance and China’s ‘ecological civilization’.......................................................................54
Sarah Cottle Stress testing policy impacts reveals potential winners and losers
For a richer, interactive experience, with videos, infographics and many other
features, access the digital version of the The Chinese dream special report
by scanning the QR code with your smartphone or visiting
www.platts.com/china-report
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Foreword
China’s green epoch
China is a country of superlatives, of enormous capacities and gargantuan
appetites. With an estimated population approaching 1.4 billion and a
mid-ranking GDP per capita of $8,582 in 2017, it cannot be anything but.
Nowhere do the superlatives flow faster than in the commodities sphere. Last
year, the country became the world’s largest importer of crude oil, overtaking
the United States. It is already by far the world’s largest producer and
consumer of coal, and its natural gas consumption and imports are rising fast.
China’s hydrocarbon dependencies embed it increasingly at the center of
world commodity trade, to such an extent that changes in its domestic
policies reverberate around global markets.
Sarah Cottle
Vice President, Global Head of Metals and And more so than ever, China is looking outward.
Agriculture and Co-Head of Content
S&P Global Platts It has chosen to use “soft power” — encapsulated in the ambitious multi-
decade Belt and Road Initiative — to consolidate its international supply
chains and spread more widely its cultural and economic influence, investing
in production capacity and major infrastructure projects abroad from ports
Use your smartphone to scan code or visit
platts.com/china-intro to watch Sebastian
to railways and power plants.
Lewis outlining the opportunities and
This creates demand for its companies, as earlier super-heated rates of
challenges facing China’s policy makers
growth cool within its domestic economy, and earns development plaudits,
as China ties the economic success of its foreign partners to its own, albeit
Use your smartphone to scan code or visit
with Beijing the center around which this universe revolves.
platts.com/cflow-video to watch a video
showcasing the vessel-tracking capabilities
China has notably not sought to export ideology, but has maintained its
of Platts cFlow
commitment to a state-led economy, pragmatically adopting market
structures where they provide more efficient economic outcomes.
Use your smartphone to scan code or visit
platts.com/china-ratings to watch Paul But there can be no question that China’s economic development has
Gruenwald discussing the economic and reached an inflexion point.
political impact of China’s policy approach
It has built vast “pillar” industries in coal, steel and refining and become the
manufacturing center of the world. It is now rationalizing these pillars,
weeding out inefficiencies, improving industrial structures and
environmental performance.
It is looking beyond the smokestack industries of the past to emerging
technologies, such as cloud computing, renewables, artificial intelligence
and robotics, focusing on its growing capacity to innovate and lead. It hopes
to take advantage of technological disruption to leapfrog into the future.
Recognizing the vulnerabilities of hydrocarbon dependence, China has become
a leader in renewables and electric vehicle manufacture. For each superlative
in the fossil fuel arena, another can be found within the new energy economy.
4 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Driven by both local and global concerns,
environmental policy is increasingly at the heart
of China’s industrial strategy and for a simple
reason: it stands to benefit most from the
“green dividend.”
Nonetheless, China’s environmental
ambitions are, for now, a rapidly-growing
but thin slice of a giant fossil fuel
economy. As a result, the country will
increasingly occupy two spaces; one
the gravitational center of trade in
hydrocarbons and metals; and
second an emergent center of
technology based on new, more
secure supply chains and
manufacturing.
However Beijing chooses to
manage these complex and
often seemingly
contradictory positions,
China is entering a new
epoch in its
development, one
that extends far
beyond the
visions of its
inception as
the People’s
Republic of
China in
1949.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 5
Executive summary
Long-term vision: In light of the than expected. China will continue to short term, the target can only be
major overhaul of government depend on all forms of energy achieved via ethanol imports, on which
announced at the CPC’s March provision, including nuclear power. Beijing has placed heavy import duties.
Congress, a more streamlined, Longer term, ethanol production
better-managed government should US-China energy relations: Despite capacity should not be a barrier to the
improve policy implementation and trade war concerns, US-Chinese mandate’s implementation.
enhance Beijing’s ability to lead energy ties may well strengthen.
China through the next phase of its China’s refining sector is the logical Cleaner act: China’s rejection of other
economic development. destination for the US’s growing countries’ waste marks a turning point
surplus of light, sweet shale crude. in its recycling industry. It opens an
Maintaining GDP growth is a core policy The US is ramping up its LNG exports opportunity for virgin polymer imports,
aim. The economy is increasingly as China emerges as the world’s but longer term the aim is to replace
consumer-driven, but investment will second largest importer of LNG. The imported waste feedstocks with
remain key to maintaining growth. The US shale industry can help meet domestic collection.
focus now is on quality over quantity, China’s growing hydrocarbon demand.
sustainability and deleveraging. By opening derivatives markets to
Near-term demand for manufacturing, Improving the environment will remain foreign participation, China hopes to
construction and infrastructure should a central focus, including the use of gain influence over international
stay robust, but growth will be slower supply-side reforms to close commodity pricing commensurate
than in the past. Market mechanisms inefficient, polluting industrial with the country’s vast appetite for
will be deployed where useful, but the capacity. As in the very recent past, raw materials. In addition, Beijing
state will continue to play an important surprises should be expected – wants to promote use of the Yuan as
role in the economy. environmental measures announced an international currency. It is no
and implemented that have significant mean task to challenge the dollar’s
Supply-side reforms are removing impacts on global commodity prices. hegemony and established market
systemic risk and excess capacity China’s efforts in this regard will structures, but China has had some
from the country’s “pillar” industries, sustain its growing international success with ferrous derivatives.
such as steel, coal, refining and leadership on climate change. Now, as the world’s largest crude
petrochemicals. China is lifting the importer, its launch of a new crude oil
overall quality of its industrial output Circular economy: China is at the contract open to international
and improving its energy efficiency forefront of the electric vehicle investors is timely.
and environmental performance. But revolution, hoping to take advantage of
capacity reductions do not the technological disruption in the auto Behind all this is the Belt and Road
necessarily mean less overall industry caused by automation and EVs. Initiative, a long-term strategy costing
production. Instead, leaner, more In combination with its huge build out of trillions of dollars, in which China hopes
competitive industries should emerge renewables, Beijing hopes to create a to create or recreate trade routes, with
capable of producing high-quality more circular economy based on Beijing at their center. It will do so by
products. emerging technologies that eventually the extension of ‘soft power’, using
reduce its rising reliance on imported finance to foster long-term
Hydrocarbon demand growth: crude oil and natural gas. relationships economically beneficial
Despite China’s efforts to develop both to its neighbors and itself. The BRI
renewables and improve energy E10 by 2020: Beijing’s plans to displace embraces economic, political and
efficiency, oil and natural gas oil with ethanol in the country’s gasoline cultural dimensions and may prove the
demand is projected to rise, leaving pool are highly ambitious as China lacks most ambitious, far-reaching
China ever more dependent on sufficient domestic ethanol production geopolitical strategy of the 21st
imports. Even coal use may increase, capacity and the roadmap to Century. It is a reminder that Beijing
if economic growth proves stronger implementation is uncertain. In the thinks big and long term.
6 © 2018 S&P Global Platts, a division of S&P Global. All rights reserved.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 7
Trade giants lock horns
In his speech at the Boao Forum for However, while the Trump
Asia in April, Chinese President Xi administration wants to narrow the US’
Jinping avoided overt criticism of $375 billion trade deficit with China, it
the US policy, but talked up the may have picked the wrong target in
benefits of a multilateral global signing off on steel and aluminum
Paul Bartholomew
trading system. tariffs of 25% and 10% respectively,
Senior Managing Editor, Metals
S&P Global Platts following a Section 232 investigation
S&P Global Ratings chief economist into the impact of these imports on US
Paul Gruenwald has identified a trade national security.
war between the US and China as the
“number one risk in our credit While the US is the world’s largest
conditions process.” World Trade importer of steel, China accounts
Organization director-general Roberto for less than 2% of its total steel
Azevedo warned a full-scale trade war imports, although for some Chinese
could have a “severe impact on the companies the figure is higher:
global economy.” Baosteel sent 4% of its steel
exports to the US last year.
But, in the eyes of the US, China is the
“bête noire” of international trade. Among Asian countries, South Korea
and Japan are far larger contributors at
According to Washington, China has 10% and 5% respectively.
stolen US technology and intellectual
property and unfairly devalues its South Korea has been granted an
currency, giving the country a big exemption, but faces quotas, while a
advantage in export markets. Japanese exemption would limit the
impact of the tariffs.
Cheap government-sponsored debt has
fueled a ramp-up in industrial capacity, Nonetheless, the fear is that steel will
particularly for steel, which then spills be redirected away from the US and
into global markets, pushing down back into Asian markets. S&P Global
prices whenever China’s domestic Platts estimates that up to 1 million mt
demand falters. of Chinese steel could be looking for a
8 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Trade giants lock horns
new home, either domestically or threatened to impose retaliatory News of the tariffs and growing trade
offshore, as a result of the US tariff. tariffs on US imports worth around tensions between the two economic
$3 billion. giants spooked global markets, pulling
The “domino effect” of a more down the US dollar and contributing to a
congested Asian steel market could be Products targeted include seamless rise in oil futures, which hit their highest
to force competing suppliers from India, steel pipe, denatured ethanol, fruit, levels in years.
Russia, Turkey and elsewhere to seek nuts and wine, along with aluminum
out other markets, thereby putting scrap and pork. Gruenwald said: “Hopefully we can
downward pressure on metals prices resolve this issue; we don’t want the
well beyond Asia. It is this “tit for tat” aspect of a biggest two economies in the world
trade war that causes market going into a trade war that’s not only
In response to the tariffs, China uncertainty; no one knows how far it going to affect them, but spill over to
complained to the WTO and might escalate. the rest of the world.”
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 9
China’s grand plans: priorities and aims
At the top, the state and the ruling China is a hugely diverse country of 1.4
Communist Party of China (CPC) think big billion people and the level of
and long term. At the 19th CPC Congress development is very uneven. The
Use your smartphone to scan code
or visit platts.com/china-intro to — the highest body within the Party country is a global leader in mobile
watch Sebastian Lewis outlining the which convenes every five years — the technology and payments systems yet
opportunities and challenges facing CPC’s General Secretary Xi Jinping has hundreds of millions of relatively
China’s policy makers outlined a development plan to 2050. poor farmers, and 30 million still living
in poverty, which makes governing this
However, it is the government’s ‘five- vast country extremely challenging.
year plan’ which tends to get the most
attention. This is a development As a result, on the ground execution of
roadmap that sets the high level specific policies may differ across
direction for the next half decade. provinces and regions, as specific local
10 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
China’s grand plans: priorities and aims
circumstances mean the priorities of Long-term consistency smokestack industries to new drivers of
lower levels of government are not always growth, designed to deal with the
perfectly aligned with those of Beijing. There is in fact remarkable consistency in problems left over from the period of
China’s development themes and priorities; fiscal stimulus, such as over-capacity,
In addition, implementation timelines may reducing poverty, improving agriculture and excessive inventory and a reliance on
not go to plan as some policies by virtue promoting industrial restructuring have all debt to support growth.
of necessity take priority over others. been key components of the five-year
plans for decades. The Party has promised to double 2010
The “internationalization of the Yuan” for GDP and per capita incomes to complete
example, while part of the 13th five-year However, recent changes in emphasis the building of a “moderately prosperous
plan, stalled and even reversed in 2016, reflect the country’s economic progress. society” by 2020. To do this will require
when the government restricted capital average annual economic growth of 6.5%
flows to ensure financial stability. Two decades ago the priority was from 2016 through to end-2020. Given
establishing pillar industries like the political importance of this goal, it is
petrochemicals and automobiles, as well one target which the government will
Long-term vision as the development of light industry and almost certainly meet.
textiles to meet not only the needs of the
Since Xi Jinping became president in population, but also to gain much needed Last year, the government targeted “GDP
2013, the market has seen more effective export revenue to fund development. growth of around 6.5%, or higher”. The
decision making and reform of the addition of just those two words — “or
economy. His leadership of the “Central Today, the language and priorities are higher” — led many analysts to raise their
Leading Group for Comprehensively totally different. The focus is on growth targets to around 6.7%. In the end,
Deepening Reforms” and the crackdown innovation and becoming a world leader expansion was much stronger at 6.9%,
on corruption have translated into more in emerging technologies, such as the strongest growth seen since 2015.
decisive policies that tackle China’s artificial intelligence (AI) and robotics,
deep-seated structural problems. as well as upgrading manufacturing so This year, the target is simply for “GDP
that it meets the standard of developed growth of around 6.5%”, suggesting that
They have also resulted in better policy economies in terms of processes, energy the economy will not expand in 2018
implementation at both central and efficiency and environmental protection. quite as fast as in 2017.
local level.
However, China’s expansion has come
More recently, the major overhaul of Innovation and growth alongside a rise in debt which could pose a
government announced at the CPC’s significant risk to the economy. Guarding
March Congress will streamline China’s massive fiscal stimulus of against this has been a key focus for the
government, making it less bureaucratic 2008-2009, which propped up demand government since the end of 2017.
and more efficient, helping to sideline for everything from commodities to
institutions within the vast state industrial machinery, meant that China Overall credit growth is slowing as the
apparatus that were blocking much was little affected by the global government tightens lending. This will likely
needed reform. financial crisis. However, the crisis be negative for commodities like steel and
revealed that its economic model was steelmaking raw materials used in capital-
However, reform in this context does not inefficient and unsustainable — a fact intensive sectors like construction.
mean that China will become a market recognized in the five- year plans issued
economy more like “the West”. It won’t. since 2011.
Cutting overcapacity
China’s ambitious development program But it has only been in the most recent and inventory
will use market systems where these five-year plan, and in particular under
help the economy run more efficiently, the leadership of Xi Jinping, that serious Xi Jinping’s “supply-side reforms”,
but the state will continue to play an moves have been made to transition which were a key plank of the 13th
important role within the economy. away from a reliance on polluting five-year plan, initially focused more on
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 11
China’s grand plans: priorities and aims
reducing low end, inefficient supply growth; the ambition is, as always, big capabilities of basic manufacturing to
than on increasing supply of higher-end and long term — China aims to lead the make Chinese companies more
products and services. world in AI by 2030. competitive both domestically and
internationally.
After years of seeing little reduction in Related to the push behind AI is the plan
overcapacity across a number of to create an ‘industrial internet.’ The big China is still very reliant on imports of key
sectors, these policies have been more data created by industry and other industrial components like integrated
successful than many imagined in sectors will be used alongside AI to circuits and high-end engineering
cutting industrial overcapacity and optimize and coordinate industrial components from countries such as
excess housing inventory. While capacity production and development. Germany, Japan, South Korea and the US.
will continue to be removed in the steel
and cement sectors, the focus now is Again, it is likely to be more than a The plan aims to displace these with
shifting to deleveraging and lowering decade before this is fully realized, but domestic production up to a level of
costs and, in particular, tax reform. the aim is for China’s industrial internet 40% by 2020 and 70% by 2025.
to lead the world in key sectors by 2035.
A simplified value-added tax (VAT) rate However, “Made in China 2025” also
regime and tax cut for small and targets the development of capability in
medium-sized enterprises (SMEs) will Made in China 2025 emerging industrial sectors, including
support corporate profitability, enabling advanced information technology,
further restructuring. Sitting alongside this is China’s robotics, rail equipment, biopharma and
industrial masterplan “Made in China new energy vehicles.
2025”, which is designed to upgrade
New drivers of growth China’s manufacturing sector to equal
that of developed countries. Environment
What is remarkable over the last two
years is the increasing focus on The initiative focuses both on The government has made a big push in
innovation. In particular, the state is developing manufacturing in emerging recent years towards the more efficient
placing specific emphasis on new sectors where China aims to be a use of coal and its substitution with
technologies like AI as major drivers of global leader, as well as upgrading the cleaner sources of energy.
12 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
China’s grand plans: priorities
ASEAN’s and aims
inevitable rise
Last year’s initiative to move 3 million (atmospheric particulate matter with a envisages China taking a leading role in
households in northern China from diameter of less than 2.5 micrometers), helping other developing countries via
coal to gas and electricity explains as well as NO2 and SO2, encouraging investment in infrastructure and
much of the rise in LNG imports seen upgrading of industrial facilities, industry. This is designed not only to
in 2017. especially in the steel sector, as well as expand foreign trade, but develop new
targeting old polluting diesel trucks. models and forms of trade with China at
In some cities, the implementation their center.
of the coal ban was effected so
enthusiastically that the program Opening up It’s a bold vision, but very much in
ran ahead of the logistics of line with Xi Jinping’s long-term
converting households to natural Similar to other policies, China’s vision for China to be “a global
gas and electricity. opening up to the world is not new, but leader in terms of composite
China’s external engagement as national strength and international
This left some households without heat envisaged in the Belt and Road Initiative influence” by 2050.
and the Ministry of Environmental (BRI) is a big departure in both scale and
Protection ordered local authorities to vision from the Go Out policy initiated in Taken as a whole, China’s policies
relax the coal ban where gas and the late 1990s. present a cohesive, integrated plan,
electricity were not available. which should take China’s development
The BRI, which is very much linked to Xi up to a similar level as that seen in
However, while coal has grabbed most Jinping — he first proposed it on a trip North America or Europe, with the
of the headlines, the government has to Kazakhstan in 2013 — has morphed visible hand of the state playing a key
also tightened regulations on emissions into a grand plan to rebuild the old role in this process.
and pollution across other industrial maritime and “silk road” trade routes
sectors, and has mandated tighter fuel that years ago linked Europe and the But over what timeline this can be
standards across the country, rolling rest of Asia to China. achieved remains to be seen. If the
out the use of lower sulfur fuels. past is any guide to the future, the
While the former Go Out policy was next few decades should certainly
In 2018, the government is expected to mainly aimed at encouraging Chinese prove interesting both for China and
continue targeting emissions of PM2.5 companies to invest overseas, the BRI the wider world.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 13
The evolution of China
Primary energy consumption (million toe)
4000
Construction begins on the CNPC and Sinopec restruct
Three Gorges Dam - the world’s creating two vertically integ
largest hydropower project oil companies
3500
Creation of the National Electric
Electricity Corporation creatio
five powe
Production peaks
at Shengli oil field
3000
Produc
Daqing
2500
China produces its first
barrel of overseas crude
Creation of CNPC
2000
1500
1000
Creation of Sinopec
500
0
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
0
500
China becomes a net importer
of crude oil
1000
Imports (million toe)
Source: NBS, GAC, NDRC, BP Statistical Review of World Energy, S&P Global Platts
All data used in creating this infographic are from government sources and official published data
14 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
a’s energy demand
tured, West-East gas pipeline China’s installed wind and solar Creation of China Energy Investment Corp,
grated begins commercial operation capacity overtakes the US the world’s largest power utility
China becomes the world’s largest
market for electric vehicles
Coal consumption falls
for the first time in 16 years
city sector reformed with First Chinese investment
on of two distribution and in US shale oil
er generation companies
China becomes the world’s largest vehicle market
China enters
the WTO
Primary energy
consumption
US
EU
India
Japan
China’s primary
energy consumption
Oil
Natural gas
Hydro, nuclear, wind
and solar / non fossil
Coal
9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Imports
Coal
Natural gas
First imports of oil through the China - China becomes a net Oil
Kazakhstan oil pipeline importer of coal First imports of natural gas
through the China-Myanmar pipeline
First imports of natural
First imports of LNG at Guangdong gas through the Central First deliveries of ESPO crude
Dapeng terminal Asian Gas Pipeline through the Russia-China pipeline
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 15
Supply-side reform: less is more
Supply-side reform:
less is more
More successful than many had imagined, China’s supply-side reforms should produce
leaner, more competitive steel and coal industries.
Industry restructuring prompts new and tackle the problems brought about
steel expansion plans by China’s investment-dependent
development model.
Coal use dependent on
economic growth This was exacerbated by the huge
fiscal stimulus of 2008-2009, which
Construction slowdown key risk for showered the economy with cheap
steel demand credit; from steelmakers to
infrastructure projects to real estate
China’s supply-side structural reforms developers, if a project needed capital
have been a major part of the 13th it got it.
Five-Year Plan 2016-2020.
Sebastian Lewis
This resulted in a glut of unwanted fixed
Head of Content, Greater China
Aimed at optimizing supply of products assets — excess industrial capacity
S&P Global Platts
and services and thus improving and empty apartments — and on the
productivity, the policy has had more other side of the balance sheet a huge
success than many might have imagined build up in debt which threatened
in helping to ameliorate the excesses economic growth.
2000
Started
Sold
1500
1000 Completed
Paul Bartholomew
Senior Managing Editor, Metals 500
S&P Global Platts
0
2001 2003 2005 2007 2009 2011 2013 2015 2017
16 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Supply-side reform: less is more
Against this backdrop the supply- China targeted the removal of 100-150
side reforms have reduced excess million mt/year of crude steel capacity
housing inventory, especially in during the 13th Five-Year Plan,
smaller cities, and removed old, equivalent to roughly one-tenth of
inefficient capacity in the steel overall capacity.
and coal industries, which have
been the particular focus of However, it was the closure of a huge
government attention. number of unlicensed induction
furnaces (IF) in 2016-2017 that really
This has helped improve industrial changed the fortunes of the industry.
profitability, lower costs and improve
industrial structure, but it would be a It is hard to pin down with accuracy
mistake to think this means that the how much steel China’s IFs produced;
coal and steel industries have been cut small in scale, relying on scrap to
down to size. If anything, it has made produce low grade construction
them stronger. products, they were very inefficient,
and operated in the shadows.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 17
Supply-side reform: less is more
18 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Supply-side reform: less is more
Like IFs, EAFs use electricity and APPARENT CONSUMPTION OF STEEL AND FLOOR SPACE STARTED
scrap rather than coal and iron ore
Apparent consumption (million mt) Floor space started (million sq m)
to make steel. But they are much 800 2000
more efficient, using less electricity
per ton, and can produce higher 600 1500
quality products.
400 1000
Although there may be a reduction in
overall net capacity, the true legacy of
China’s supply-side reforms is likely to 200 500
Coal rationalization
The problems affecting the coal Corp., the country’s largest coal miner, to relax operating restrictions, which
industry are if anything more acute with China Guodian Corp., one of its saw prices ease, but still remain
than the steel sector. Seaborne coal largest power companies. The elevated, compared with the lows of
prices are formed largely off the back combined entity will likely be the 2014 and 2015, hugely improving the
of southeast coast Chinese coal world’s largest utility. sector’s profitability.
trade, affecting markets worldwide,
but because there is little negative Meanwhile, as of this year the The government will probably exceed its
spillover in terms of trade frictions, government claims to have cut 800 target of eliminating 800 million mt/
the sector makes fewer waves million mt/year of production year of inefficient coal mining capacity,
outside China. capacity, achieved by closing smaller, and it will stop approving new mines
privately-owned mines, especially which produce inferior quality, high
In 2017, China had around 4,000 coal those with poor safety records and sulfur, high ash coal, but Beijing’s plans
mines, with total capacity of 3.41 environmental standards. also envisage adding around 500 million
billion mt. With only a few large mt/year of advanced coal mining
state-owned players, this led to As well as closing mines, the capacity by 2020.
structural oversupply and declining government also strictly controlled
corporate profits. With coal providing production, allowing mines to operate The supply-side reforms are just as
around 60% of China’s total energy for no more than 276 working days a much about improving industry
needs, the sector is a systemic risk to year, a huge reduction from their normal structure and the quality of the coal
the whole economy. 330 days. produced than reducing coal use — at
least in the short term.
Similar to the steel sector, the This policy saw China increasingly
government embarked on a program of short of coal, driving up prices and China will be hugely reliant on coal
capacity reductions and state- imports by as much as 50%. The for years to come and its ability to
sponsored vertical integration. effects rippled across the global coal reduce coal use is heavily
market, giving a boost to the fortunes dependent on the rate of economic
Around a year and a half after a policy of an industry many had thought in growth. As in 2017, faster growth
document outlined plans to integrate terminal decline. means a return to higher coal use,
coal miners and electricity generation despite the construction of huge
companies to better match supply with By the middle of winter, the time of renewables capacity and the
demand, the government approved the peak coal demand, prices had risen so restructuring of the economy away
merger of state-owned Shenhua Group much that the government was forced from industry to services.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 19
Alive and kicking: China hydrocarbon demand
20
15
10
Gas
GDP
5
Oil
0
Coal
-5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
20 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Alive and kicking: China hydrocarbon demand
Category Right
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 21
Alive and kicking: China hydrocarbon demand
Coal-to-gas switching The surge in gas demand revealed a and potentially add 30 Bcm from the 4th
number of insights: Central Asia Line and another 30 Bcm
The backstop reliance on coal can be from Russia via the less certain West
seen from the problems encountered A limited response in terms of Siberian Altai project, which would
by the country’s “2+26 cities” program increased pipeline supplies, despite increase total pipeline import capacity
instituted last year, which aims to significant spare pipeline capacity to 165 Bcm.
convert millions of households and from both Myanmar and Central Asia.
commercial buildings, such as LNG import capacity stood at 108 Bcm
schools and hospitals, from coal to A lack of transmission capacity in early 2018 and is expected to rise to
gas heating, thereby significantly between southern LNG import 122 Bcm by 2022, according to S&P
reducing air pollution. terminals and northern demand Global Platts Analytics.
centers.
Under its 13th Five-Year Plan 2016– However, the rise in gas demand was
2020, China aims to increase gas use A significant under-estimation of the only partially the result of the
in the energy mix to 10%, from 5.9% amount of coal that needed to be conversion program. Recovering
in 2015. replaced, re-enforcing other industrial activity and higher than
indications that Chinese coal use is expected GDP growth contributed
The additional gas demand this will higher than reported. significantly, which again explains why
create will be met only partially by coal use could rise at the same time
higher domestic supply, leaving a And, as shortfalls emerged, city gas that environmental regulations seek to
widening supply gap to be met by was the priority, with LNG prices for curb consumption.
imports, both pipeline and LNG. trucking being allowed to rise sharply
to record highs. This reinforces the perception that
Again, lofty targets and zealous China’s ability to meet its environmental
implementation have seen ambition run goals and increase the proportion of gas
ahead of infrastructure. Gas imports in the overall energy mix would be
severely challenged in a high economic
The 2+26 cities program has been It is clear that domestic gas production, growth scenario.
scaled back as a result of inadequate while growing at 7.7% year on year to
gas transmission and import reach 147.42 billion cubic meters in
infrastructure connected to the 2017, is not growing fast enough. Oil demand
northern provinces concerned, and a
lack of equipment to carry out all of Chinese gas demand is expected to rise While China may be pursuing a
the conversions. 10% to nearly 260 Bcm in 2018 by more sustainable economic model,
state-owned company CNPC, after it is also being pulled by the
The origins of this plan were stringent rising 17% in 2016. demands of its economy in the
reductions in particulate matter opposite direction, a conundrum
concentrations of at least 15% The growing deficit can only be met by that is only likely to reinforce the
promulgated by the Ministry of imports and will require significant new drive behind renewables and
Environmental Protection in August investment in transmission electric vehicle (EV) deployment.
2017 for the October-March period of infrastructure. It will also require
2017/18. further investment upstream, notably in Despite having the world’s largest
Central Asia. fleet of EVs, China’s apparent oil
The level of conversions prompted a demand is forecast to rise 4.6% year
sharp rise in LNG demand, with China’s In addition to new LNG terminals on year in 2018 to 12.05 million b/d.
northern LNG terminals operating at planned and under construction, China This is expected to result in a 7.7%
full throttle. Chinese LNG imports has projects in place to import 38 Bcm increase in crude oil imports to 9
leaped 47% year on year in 2017 to of gas from Russia via the under million b/d, according to CNPC’s
37.76 million mt. construction Power of Siberia pipeline Economics and Technology Research
22 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Alive and kicking: China hydrocarbon demand
LNG IMPORTS: CHINA MOVES INTO 2nd PLACE CHINA’S GROWING SHARE OF UNCONTRACTED DEMAND
(million mt) China South Korea Japan (Bcf/d) (%)
90 10 25
Forecast
8 20
% uncontracted
60 demand
6 15
Uncontracted
4 10 demand
30 Contracted
2 5 demand
0 0 0
2014 2015 2016 2017 2010 2012 2014 2016 2018 2020
Source: S&P Global Platts Analytics Source: S&P Global Platts Analytics
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 23
Alive and kicking: China hydrocarbon demand
ELECTRICITY AND CARBON EMISSIONS VERSUS GDP Institute (ETRI), based on GDP growth
(%) of 6.7%. According to ETRI’s data,
15 China in 2017 surpassed the US to
become the world’s largest crude oil
12
importer, with the dependency on
9 imported oil hitting 67.4%.
GDP
6 Electricity
generation However, oil product demand growth
is expected to rise more slowly than
3
in the past as a result of a number of
0 Carbon factors; the growth of New Energy
emissions
Vehicles (NEVs) – primarily battery
-3
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 and plug-in hybrid vehicles; rising
ethanol volumes in the gasoline pool,
Source: BP Statistical Review of World Energy, World Bank the construction of a high-speed
train network, which will impact
aviation fuel demand, and increased
IMPORT DEPENDENCY RATIO vehicle sharing.
(%)
80 This is expected to leave a surplus of
Oil oil products for export of about 46.8
60 million mt, according to ETRI.
24 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Alive and kicking: China hydrocarbon
Category
demand
Right
2016
Nineteen refiners allowed to import 73.77 million mt/year (1.5 million b/d).
Independent refiners given quotas to export refined products.
Eight refiners promise to shut 20.81 million mt/year (418,000 b/d) of capacity in return
for 24.58 million mt/year (494,000 b/d) of import quotas.
China’s crude imports rise 13.3% to 7.63 million b/d in the year.
China’s product exports rise 50.3% year on year to 38.2 million mt.
Illegal trade in quotas and tax evasion becomes rampant and pollution veers
out of control.
2017
Government clamps down on exports by independent refiners without quotas.
Number of independent refiners allowed to import crude rises to 32. Independents’
annual import volumes rise to 101.69 million mt (2.04 million b/d).
Capacity closure commitments total 61.62 million mt/year (1.24 million b/d).
Government tightens quota regulation.
Government stops accepting new crude import quota applications from May 1.
China’s crude imports rise 10.5% to 8.43 million b/d. Oil products exports rise 7.3%
on year to 40.1 million mt.
Government starts to scrutinize consumption tax governance and illegal quota trade.
Central government bodies agree to tighten monitoring around the sector.
2018
Government eases controls on crude imports and refined product exports, but new
export quotas withheld.
Environmental protection fee turned into environment tax effective January 1.
State Administration of Taxation announces measures to enforce oil products
consumption tax payments.
The National Development and Reform Commission unveils measures to punish refiners
failing to meet government guidelines on capacity expansions, environment and safety
by early August.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 25
US and China: energy interdependence
Chris Midgley Despite increasing rivalry and trade NGLs — propane, butane and
Global Director of Analytics frictions, the world’s two largest increasingly ethane — compete with
S&P Global Platts economies, China and the United States, petrochemical feedstocks like naphtha
are becoming increasingly interdependent and are used to produce gasoline
Zhuwei Wang when it comes to energy. On the supply blending components.
Senior Analyst
side, the US shale revolution is reshaping
S&P Global Platts
global energy markets, while China is the NGLs’ role in helping balance global
Sebastian Lewis epicenter of demand growth. demand for petroleum liquids will be
Head of Content, Greater China significant. When NGLs are included, US
S&P Global Platts Simply put, China is where demand light crudes’ share of the increase in global
meets US supply. liquids production between 2015 and 2025
rises from just over 40% to just under 50%.
S&P Global Platts Analytics forecasts
that global liquids production needs to Meanwhile, on the demand side, despite
rise from just under 95 million b/d in its new focus on environmentally
2015 to over 105 million b/d by 2025 to sustainable technologies, China last
meet rising world demand. Much of this year still overtook the US to become the
supply growth will be light crude, and in world’s largest importer of crude.
particular US light crude, which will China’s crude imports rose 780,000 b/d
account for just over 40% of growth in year on year to 8.43 million b/d, a trend
global crude output over this period. which is set to continue.
The increase will come almost entirely Platts Analytics forecasts that
from the US’ shale plays, using the Chinese oil demand will rise by more
innovative drilling and extraction than 4.5 million b/d over 2015-2025,
techniques developed over the last two making the country the single biggest
decades. The most prolific of these, the driver of global oil demand well into
Permian Basin in West Texas, will the next decade.
account for most of the growth.
26 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
US and China: energy interdependence
US refineries are designed to process a formed the baseload of their refining US CRUDE OIL EXPORTS 2016 - 2025*
slate of crudes from light, sweet (low slate. But, in 2015 restrictions on the (million b/d)
5
sulfur) grades to heavier, sourer (high independents’ crude imports started to
sulfur) grades from the Middle East, ease. Since then, they have accounted 4
Asia
Latin America and Canada. US refiners for most of the growth in Chinese crude 3 Europe
have been able to substitute a significant demand. By March 2018, independent Canada
2
Latin
proportion of imported light crudes, like refineries’ crude imports had reached America
1
those from West Africa, with domestic an all-time high of 2.34 million b/d.
shale oil, but they still need a significant 0
2016 2019 2022 2025
proportion of cheaper, imported medium They are now able to access lighter *Includes condensates
to heavy sour crudes to run their crudes, which has allowed them to run Source: S&P Global Platts Analytics
refineries at maximum efficiency. their refineries more efficiently and
maximize their yield of lighter more
ESTIMATED REFINERY RUNS
This requirement means the US will valuable products. They have invested in BY TYPE OF CRUDE, 2015
continue to import heavy, sour crude additional processing units to produce (million b/d) Sweet total
even as its exports of light crude rise. the higher quality products like gasoline
China 46%
S&P Global Platts Analytics forecast that blending feedstocks that China
by 2025 the US will be exporting more increasingly needs. India 30%
than 4 million b/d of light sweet crude, of
However, as a whole the sector is unable Japan 21%
which over 2.5 million b/d will go to Asia.
to process high sulfur crudes, owing to a South
14%
Korea
Unlike other large Asian refiners, which lack of desulfurization capacity. They
0 2 4 6 8 10
are primarily dependent on medium- therefore typically run on a sweeter Light Medium Heavy
heavy sour grades from the Middle East, slate than other Asian refiners. Source: S&P Global Platts Analytics
China imports crude from a wide range
of countries, including Angola, Russia,
Brazil and Venezuela, in addition to Light end of the barrel middle distillates demand will continue
imports from the major Middle Eastern to grow, demand for light products will
oil producers. As a result, it has a crude There are two other factors that make grow faster.
slate that is both heavier and sweeter China the natural home for US crude.
than other Asian refiners. Shale crudes tend to be paraffinic, with
First, to cut pollution, the government good naphtha and ethylene yields, which
Aside from its vertically-integrated has mandated the use of much cleaner make them particularly well-suited for
state-owned oil majors, China also has a fuels across the country. Last year, the petrochemical feedstock production.
sizeable independent refining sector, maximum level of sulfur allowed in both
which accounts for more than a quarter gasoline and gasoil fell from 50 to 10 Some of China’s new oil product demand
of total refining capacity. Given the parts per million. For many of China’s will be met by new complex refineries,
name “teapots” due to the perception independent refiners, unable like those being built in Dalian and
that they were small-scale, with very economically to remove the sulfur from Zhoushan, which will be able to process
simple refining units, many of the the crudes they process, sourcing heavier, sour crudes. But they alone will
independents now have a more complex sweeter grades, like those from the US, not be able to me all new demand,
configuration than their name suggests. is the solution. forcing China’s existing refineries to look
Many are capable of producing high westwards to source lighter crudes.
quality products and petrochemicals. Second, the pattern of Chinese demand
is changing as the country shifts from an In short, the US will optimize its
Once barred from importing crude, they investment-led economy to one based refinery operations by exporting light
invested in secondary refining units to more on consumption, which will require sweet grades, while China’s refining
help them process the heavier crudes more gasoline and petrochemicals than sector will reach maximum efficiency
and residues like fuel oil that historically it will gasoil and heavy fuel oil. Although by importing them.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 27
Category Left
28 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Category Right
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 29
Changing trade flows
India, China and Japan account for Recent changes in policy and market
about a third of global crude dynamics have impacted global
imports, with China accounting for trade flows.
around half of this total. It is
therefore not surprising to see the OPEC produces predominantly sour
density of data points on the (high sulfur) crudes. Its decision from
facing page. the start of 2016 to curb its members’
output in an effort to rebalance the oil
The red points represent vessels market has seen the price of sour
carrying Middle Eastern crude, showing crude oil rise relative to lighter,
a huge flow of crude from the Arabian sweeter grades.
Gulf to India, through the Straits of
Sebastian Lewis
Malacca — a narrow channel that This has resulted in Chinese imports
Head of Content, Greater China
S&P Global Platts represents a potential chokepoint for from the Middle East declining with
crude supplies to Asia — and on to an increase in imports of lighter
China and Japan. sweeter grades.
Middle Eastern crude forms the base At the same time, Washington lifted
load for most Asian refiners; around its restrictions on the export of US
85% of Japan’s crude comes from the crudes, and the first cargoes set sail a
Arabian Gulf. China’s imports, however, few weeks later. These have gone to
are much more diverse. more than 30 countries, but the US
Other
Russia
Lat Am
Angola
2017
US 2016
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
30 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Changing trade flows
has recently emerged as a crude These are required by US Gulf Coast Russia was the largest supplier of crude
supplier to China. Total Chinese refiners configured to run on heavier, to China last year.
imports from the US last year were sourer grades.
just over 150,000 b/d. Around half of this was delivered via the
Although generally sweet, Angola’s Eastern Siberian Pacific Ocean (ESPO)
cFlow data shows concentrations of oil is typically heavier than crude pipeline into northeast China.
yellow data points around West from Nigeria. cFlow data indicates
Africa’s two major oil producers — that more than 60% of Angolan The remainder was mainly ESPO
Nigeria and Angola. The quality of their exports went to China in 2017, making crude loading from the far east port
crudes plays a large part in the country the third largest supplier of Kozmino.
determining destination. of crude to China after Russia and
Saudi Arabia. These flows eastward have changed the
Nigerian crudes, which are light and quality of Russian Urals blend, which
sweet, now tend to flow to Europe. China also imports crude from Latin flows westward by both pipeline and
Once heavily favored by US East Coast America. Brazil overtook Venezuela as ship, making it sourer and heavier than
refiners, they have been shut out of the largest Latin American exporter of in the past.
the US market by shale oil, which is crude oil to China in 2017, and the
also light and sweet. Yet imports to region’s exports to China as a whole are However, cFlow shows that China also
the US of heavy crudes from now slightly higher than those from received a few cargoes of Urals crude,
Venezuela and the Arabian Gulf can Angola. About a third of Brazil’s crude which travelled all the way from the
still be seen. exports now head to China. Black sea.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 31
Clearer skies: China’s New Energy Economy
500
400
Large hydro
300 Wind
Solar
200
100
0
2007 2008 2009 2010 2011 2012 2013 20214 2015 2016 2017*
*2017 data solar National Energy Administration, wind Global Wind Energy Council
Source: IRENA
32 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Clearer skies: China’s New Energy Economy
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 33
Clearer skies: China’s New Energy Economy
Moreover, China’s dependence on crude has undergone, and continues to are essentially manufacturing
oil imports is high and growing. More undergo massive rural-urban migration industries, and low-cost manufacturing
than two-thirds of its crude amid an aging population, which means plays to China’s strengths.
consumption was imported in 2017. the number of people of working age is
beginning to fall. The benefits are obvious. A Chinese-
Its attempts to reduce the carbon manufactured solar panel or wind
intensity of its hydrocarbon use by As a result, labor costs are rising and turbine, deployed in China, creates a
switching from coal to gas in heating Chinese industry needs to become more circular economy in which energy
and from oil to gas in trucking mean its efficient and more focused on higher generation is no longer dependent on
dependence on imported gas is also value-added goods to compete on world imports. Jobs and capital stay at home
rising fast. markets. Energy in China needs to providing demand for an industry that
remain cheap. can also sustain major exports.
As a result, China’s interests are
increasingly drawn into the long and In terms of the troika of energy policy The electric vehicle (EV) provides
unstable international supply chains on goals – affordability, security and similar if not greater benefits. Despite
which oil and gas imports depend. Its sustainability – the hydrocarbon the huge size of its car industry,
economy is ever more vulnerable to economy is distinctly sub-optimal for Chinese manufacturers have never
external price shocks. Chinese needs. managed to break both a domestic and
export market preference for
At the same time, the acquisition of established brands.
imported hydrocarbons represents a China and The New Energy
massive outflow of capital – estimated Economy However, the advent of automation and
at some $165 billion on crude oil alone EVs create a disruptive moment in the
in 2017. It is here – at the intersection between auto industry’s evolution. It is this
energy provision and industrial opportunity that China hopes to grab.
Even if the carbon intensity of production – that China is uniquely
hydrocarbon use can be reduced, rising positioned to reap the benefits of the Rather than play catch-up against
transport needs still based primarily on “green dividend.” decades of research and expertise in
oil mean China is effectively paying to the development of internal combustion
import pollution. Renewable resources such as wind and engines, China hopes to gain a lead over
solar are widespread. They are its rivals at a moment when the
Moreover, the provision of cheap harvested rather than mined, and the underlying technology of transport is
energy underpins China’s huge need for ‘harvesting’ equipment – solar undergoing fundamental change.
manufacturing industries. The country panels and wind turbines – mean they
Moreover, EVs extend the circular
economy from energy generation into
CHINESE E-HDV SALES IN 2017 transport. As the carbon intensity of
(’000 vehicles) China’s electricity generation falls, the
60
benefits of EV deployment rise. EVs
Cumulative Chinese e-bus sales
50 500
(’000 vehicles) made in China running on domestically-
400 generated low carbon electricity are a
40
300 PHEVs Bus (PHEV) far more attractive economic and
BEVs
30 200 Trucks EV environmental proposition than foreign
100
Bus (BEV) car imports running on imported oil.
20 0
2015 2016 2017
10
EVs reduce localized urban air
0 pollution, even if the electricity is
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec partially generated from distant
Source: www.EV-Volumes.com coal plants.
34 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Clearer skies: China’s New Energy Economy
They displace imported oil, reducing ENERGY COST DECLINES - MEAN LCOE*
the oil import bill and exposure to ($/MWh)
both the price and physical insecurity 200
178
of international oil supply chains.
148 Nuclear
150
(+20%)
EVs and renewables in tandem 123
reduce greenhouse gas emissions, 111 102
Coal (-8%)
100
providing Beijing with a global 85
83
leadership role in the fight against 60 CCGT (-28%)
50 Solar** (-72%)
climate change. 50
45 Wind (-47%)
energy resources.
increasingly innovative. Trina Solar has established fabrication facilities in
achieved the world efficiency record for Brazil and the United States and
Can it be done? laboratory scale multi-crystalline- expects to start up in Canada this year.
silicon solar cells.
In many ways it is being done, but there Although the primary focus on gas
are major challenges and potential This technology dominates the global has been for city gas use and coal
contradictions. market for solar power, making up 70% displacement in heating, China
of global PV production in 2016. also leads the world in the use of
China installed 19.5 GW of new wind LNG as a transport fuel. China is
capacity in 2017, nearly three times In addition, by almost any measure, estimated to have 300,000 LNG
as much as the next largest country, China leads the world in road trucks on the road, in contrast to
the United States, bringing transport electrification. It makes about 2,000 in Europe.
cumulative installed capacity to 188 more, buys more and, with 75
GW. Although the pace of new different models available in 2017, The adoption of LNG and electrification
installations has slipped in the past offers consumers a wider choice of EV in the heavy-duty vehicle market is of
two years, China’s wind additions last than any other country. Chinese EV particular significance. Alternative
year represented 37% of the world passenger car sales totaled 579,000 energy HDVs displace much more fuel
total. China hosts 35% of the world’s units last year. Add in about 20,000 than passenger EVs because of the high
wind capacity, and last year became imports and China accounted for mileage and low fuel efficiency of
the third largest installer of offshore around half of global EV sales. conventional HDVs.
wind – a development unique outside
northern Europe. Chinese manufacturers also have a near
total grip — about 90% — on the Constraints
China became the first country in 2017 market for electric heavy-duty vehicles
to pass 100 GW of cumulative (e-HDVs), selling 198,000 commercial However, all this has to be placed within
installed solar capacity, adding EVs in 2017, about 85% of which were the context of the huge Chinese
around 50 GW last year alone to bring city buses. economy, one built on hydrocarbon use,
the total to 126 GW. and most particularly coal in power
The country’s lead in e-HDVs represents generation. The contribution of
Moreover, it is by far the world’s a promising export platform. Chinese renewables, excluding hydropower, is
dominant force in the manufacture of e-buses are being sold around the world significant but still small. Solar
solar panels and has been so since to other polluted metropoles. Chinese generated just 1.1% of Chinese
2008. China’s solar industry is e-bus and e-truck maker BYD has electricity in 2016, wind 3.9%.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 35
Hydrocarbons vs the N
This infographic contrasts the risks associated with China’s current hydrocarbon-based eco
dependency on imports.
LNG Coal
Refiner terminal ports
End-users
CO2 emissions
An increase in coal use in 2017
suggest China’s CO2 emissions may
have resumed their upward trend. City
High emissions air quality is improving, but remains
system below international standards.
36 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
New Energy Economy
onomy with the opportunities offered by the New Energy Economy
Renewables
Electricity
storage
Battery Low emissions Biofuels Agriculture
metals system
(lithium, cobalt,
manganese,
nickel)
uts
Inp
OEM OEM
Inp
New energy
uts
vehicles
Stockpiles
Base metals
(copper, iron ores)
Graphite
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 37
Clearer skies: China’s New Energy Economy
At the end of 2017, China’s growing to vulnerabilities which can have a become increasingly dependent on
fleet of EVs displaced less than big impact on industry expansion, for lithium imports as battery
150,000 b/d of road transport fuel, example the withdrawal or manufacture expands.
as opposed to more than 8 million maladministration of subsidies at
b/d of imported crude. home, and the imposition of import Cobalt is perhaps the biggest
tariffs on Chinese exports by foreign insecurity given the concentration of
EV sales rose rapidly, by 53% in 2017 importing countries. production in the Democratic Republic
in comparison with 3% for the of Congo, but as with lithium, growing
vehicle market overall, but EVs still Moreover, rapid growth creates its demand for these elements has
only accounted for just 2.7% of the own strains, for example in the prompted a large number of new
28.9 million locally-produced interconnection of wind and solar to supply projects.
vehicles sold in 2017. the grid, which has led to high rates
of renewables generation Chinese companies can be expected to
In short, both oil demand for curtailment, particularly in northern play a leading role in agreeing offtake
transport and the volume of imported China, a problem which the National agreements that secure finance for new
oil is still rising. Energy Administration hopes to lithium and cobalt production.
resolve by 2020.
In addition, the New Energy
Subsidy bill In addition, the deployment of charging Economy supply chain differs in two
points for EVs is behind schedule. key respects from hydrocarbon
China’s renewable and EV industries China’s urban areas are densely supply chains.
have been developed with significant populated and high rise.
state support designed to promote First, the key components are high
environmental objectives. Incentives for Its main cities have a serious shortfall value but low volume, making them
EVs, for example, are provided by of parking spaces. In some cases, higher easy and cheap to store, in
central and local government. However, penetration of EVs will require contrast to the millions of barrels
as EV sales grow, so too does the substantial urban redevelopment. of oil that make up even a 30-day
subsidy bill. strategic oil reserve.
For EVs, the Ministry of Finance is New dependencies Second, they are not critical to the
reforming the subsidy system to generation of power or movement of
remove direct incentives and move to a The New Energy Economy also creates people and goods because they are
tradable credit system for vehicle new commodity dependencies, notably material components not fuels.
manufacturers and importers by 2019, rare earth metals and the lithium, cobalt
which incentivizes both EV production and graphene required for battery China is uniquely positioned to reap the
and better EV technology, the latter manufacture. green dividend, based on its
being a measure designed to boost manufacturing capabilities. Moreover,
Chinese EV exports. Winning the race to become leaders in as it grapples with the pollution issues
battery manufacture is of critical caused by hydrocarbon use at home,
However, capital in China’s state-led importance, and China is in some and the supply insecurities it creates
system is often deployed inefficiently in respects better positioned than some of abroad, it is also a country with more
a race to build production capability, its competitors. than most to gain.
resulting in overcapacity, bad debts and
inevitable periods of industry China dominates the production of As a result, China is likely to continue
consolidation. rare earth elements and has the the mass deployment of capital in
world’s largest reserves. It is the pursuit of ambitious government set
This has been the case in both fourth largest producer of lithium and targets, while at the same time it tries
China’s solar market and its an even bigger processor of lithium- to eradicate the wasteful inefficiencies
conventional car industry. This leads bearing pegmatite. However, China will this often creates.
38 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Clearer skies: China’s New Energy Economy
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 39
Two birds, one stone: China’s E10 mandate
2000
1000
0
2004 2006 2008 2010 2012 2014 2016
Source: COFCO public report, Government announcement
40 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Two birds, one stone: China’s E10 mandate
Initiating pilot schemes before national TAX INCENTIVES FOR ETHANOL PRODUCTION
implementation is typical in China, but
(% VAT exemption) 1st generation 1st generation new feedstocks 2nd generation
there is no guarantee that the program 100
will be extended if the pilot scheme runs 80
into problems.
60
40
Uncertain roadmap
20
The E10 mandate certainly has high
0
level political support. In September 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2017, 15 Chinese ministries, including Source: COFCO public report, Government announcement
China’s top economic planner, the
National Development and Reform
Commission (NDRC), jointly issued the sales price is regulated and is its desire to stimulate domestic
“implementation plan on the expansion equivalent to 91.11% of the government ethanol production.
of biofuel ethanol production and regulated conventional gasoline
promotion of the use of automotive ex-refinery price. Earlier, at the beginning of 2016, the
ethanol gasoline.” government had ended its nine-year
Subsidies for grain-based ethanol were corn stockpiling system. This had been
Various provincial governments are phased out in 2016, but are still introduced to boost food security and
working on implementation, but this provided for non-grain ethanol support rural incomes.
does not mean that a well-planned local producers.
roadmap exists. However, it also pushed up corn prices
Ethanol producers are thus exposed and produced huge stocks of aging corn.
National industrial supporting to the margin between corn and
policies are not yet well formulated gasoline prices. In 2014-2015, ethanol A nationwide roll-out of E10 could
and the National Energy producers suffered heavy losses as whittle down China’s corn surplus within
Administration (NEA) has summoned corn prices rose and international oil 5 years, after factoring in gasoline
think tanks to study solutions to prices fell. demand growth and assuming that
China’s ethanol supply deficit and domestic corn is the only feedstock for
financial subsidy issues. These losses were amplified by ethanol production.
reductions in government subsidies.
The E10 mandate is not China’s first In addition, the end of the stockpiling
foray into ethanol for fuel use. China is This profit crunch forced ethanol program has seen corn prices fall by at
currently the world’s fourth largest consumers to look abroad. Chinese least Yuan 300/mt ($47.60/mt), causing
ethanol consuming market after the imports of denatured ethanol jumped to renewed concern over rural incomes.
United States, Brazil and the EU. 350,000 mt in 2015, and advanced to Directing the corn surplus into ethanol
China’s fuel ethanol market remains 650,000 mt in 2016. production would help support corn
highly regulated. prices while the surplus stocks are
drawn down.
Ethanol producers are licensed by Domestic stimulus
government, E10 blending and
distribution are regulated, and the end However, Beijing wants to Building capacity
markets are designated pilot areas. encourage domestic production
rather than imports. In January Beijing’s ambitions face substantial
Feedstock is the most important cost 2017, the government increased challenges. In the short term, ethanol
component for ethanol production, the import duty on denatured production capacity is insufficient to
accounting for 80% of the cost. The ethanol from 5% to 30%, indicating convert enough corn to ethanol.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 41
Two birds, one stone: China’s E10 mandate
42 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Two birds, one stone: China’s E10 mandate
In addition to the existing 2.6 million such as MTBE and FCC light naphtha capacity is estimated at about 5.6
mt/year capacity, there is about 1 etherification (LNE). million mt; work on some of the new
million mt of capacity under capacity has now been halted.
construction that could be Ethanol will improve gasoline
commissioned around 2020. Another 2 composition in terms of olefin, Both MTBE and LNE are oxygenates,
million mt of capacity is planned. aromatic and sulfur content but the new fuel specification for E10
requirements as a result of dilution. gasoline mandates no oxygenates
In the medium to long term, ethanol shall be added to gasoline
production capacity should not prove a E10 use implies a 3.3% reduction in components, except for the 10%
bottleneck so long as ethanol fuel efficiency compared with denatured fuel ethanol.
production remains profitable and regular gasoline, which means an
demand, driven by the E10 mandate, offsetting increase in total gasoline In addition, ethanol does not contain
remains healthy. demand to achieve the same fuel aromatics, olefins or sulfur and has a
economy. high octane number. Adding 10%
However, past pilot programs suggest ethanol will dilute the gasoline pool and
that the actual market penetration of Ethanol-blended fuels only remain improve its composition.
E10 could be much lower than expected stable for a maximum of 90-100 days
by the government. because of water absorption. This will As a result, the octane requirement for
impact E10 gasoline storage and other components can be lowered by 1
Retail sites provide both E10 gasoline distribution. to 2 points.
and regular gasoline, with the
consumer free to choose. Consumers Additional blending infrastructure will However, there are also
favor regular gasoline because it has a be needed to cope with the rise in downsides to adopting ethanol. It
higher energy content, but the price is ethanol volumes. has only two thirds the energy
based on volume and is the same as for content of gasoline.
E10 gasoline. Chinese refineries are gearing up to
accommodate the national fuel Fuel economy may slide by about
The government may address this issue. specification transition in 2019 from the 3.3% when using E10 relative to
In recently announced local E10 plans, China 5 standard to China 6. regular gasoline, requiring a
Shandong and Tianjin both mandated commensurate increase in overall
the complete replacement of regular The biggest challenge is reducing olefin gasoline demand to meet the same
gasoline with E10. and aromatics content, while fuel economy.
maintaining the same level of octane.
In practice, China’s national oil In addition, ethanol blends have a shelf
companies, which control 80% of Refiners have long blended MTBE life of only 90-100 days, rather than
the gasoline retail market, are likely (methyl tertiary-butyl ether) into regular gasoline’s several years, which
to have higher compliance rates the gasoline pool to boost octane. introduces new challenges for storage
than private retail stations, but and distribution.
some choice for consumers is likely MTBE has been banned in some
to remain. countries, such as the US, owing to Pipeline distribution of anhydrous
groundwater contamination from ethanol is not currently possible
underground storage tanks. China’s because it absorbs water from the
Refinery impacts MTBE capacity stood at 19 million environment.
mt in 2017.
The implications of a national E10 As most Chinese ethanol production
mandate are large for the refining sector: In addition, some refineries have is located in northeast and eastern
adopted LNE as a means to reduce China, it will be difficult and
Ethanol squeezes out the addition of olefin content and boost octane. expensive to transport it to China’s
other oxygenates in the gasoline pool, Current and under construction LNE western regions.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 43
Waste matters
Waste matters
When China sneezes, the world shakes. Beijing’s environmental policies can have profound
and rapid impacts on markets worldwide.
Chinese virgin polymer demand rises particularly in the United States and
Europe, as countries that had relied on
Inefficient waste recycling units shut China as a recycling destination were
forced to look for alternatives. China
Domestic waste feedstock use accounted for around 56% of global
to increase plastic waste imports in 2016, so it is
clear why so many countries have been
In July last year, China notified the rattled by the new policy.
World Trade Organization that it would
ban imports of “24 kinds of solid However, the loss of this feedstock is
wastes, including plastics waste from likely to boost Chinese demand for
living sources, vanadium slag, unsorted virgin polymer, and new polyethylene
Paul Bartholomew
waste paper and waste textile (PE) capacity is being brought on-
Senior Managing Editor, Metals
S&P Global Platts materials.” The waste had been turned stream in places like the US, Middle
into plastic bottles and other building East and India, all of which are eyeing
materials such as carpets and piping. the Chinese market.
In essence, China was telling the world: Scrap polyethylene accounted for 1.5
“We’re cleaning up our act and we don’t million to 2 million mt of imports in 2017,
want your garbage anymore!” of which 50-70% was high-density PE
(HDPE), and the remainder low-density
The ban took effect January 1, causing and linear low-density PE, according to
waste to pile up at foreign ports, market estimates. Polyvinyl chloride
HDPE 0.1%
LLDPE 18.6%
LDPE 13.6%
PET 80.0%
44 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Waste matters
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 45
China’s Belt and Road Initiative
Energy and political security central Seen in this way, the BRI is arguably
to BRI concept the world’s largest venture capital
(VC) project.
Success depends on winning hearts,
minds and private capital
Concept fluidity
Conceived in 2013, China’s Belt and
Road Initiative (BRI) aims at nothing Chinese President Xi Jinping
less than connecting — or under introduced the Silk Road Economic
Paul Gruenwald
some interpretations, reconnecting Belt concept in a speech in
Managing Director, Chief Economist
— the Eurasian supercontinent. Kazakhstan in September 2013.
S&P Global Ratings
This is to be done by land and sea This initial strategic vision was
“Silk Roads”, using infrastructure and developed further in the ensuing years,
industry, led at least initially by converging around regional connectivity
Chinese official financing. and economic integration through the
movement of goods, services and
Many of the specifics of the BRI remain information.
fluid, but it will be a decades-long effort
involving dozens of countries, with a This culminated with a report by the
cost running into trillions of dollars. National Development and Reform
Use your smartphone to scan code or visit
platts.com/china-ratings to watch Paul Commission entitled “Vision and
Gruenwald discussing the economic and An undertaking of this magnitude has Actions on Jointly Building the Silk Road
political impact of China’s policy approach potentially large payoffs, as well as Economic Belt and 21st Century
potentially large risks. Maritime Silk Road.”
46 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
China’s Belt and Road Initiative
Whatever the correct interpretation, the persistent trade deficits. Although Yunnan province, where considerable
ambition and scale are massive. China had an overall 2017 current refining capacity is reportedly being
account surplus of 2% of GDP, the built. Kunming is also the terminus of
energy trade balance showed a an extensive rail network for
Geography and geopolitics modest deficit. Southeast Asia, parts of which are
currently in various states of
China is bordered by no fewer than 17 Over time, the energy trade balance construction.
countries. Of particular interest to deteriorates or improves as global
Beijing are the western borders, which energy prices rise or fall, respectively. In Central Asia, the BRI envisages
abut Central Asian countries once part But the fact remains that China is an upgrading and extending an earlier
of the former Soviet Union. “energy short” country, since the energy gas pipeline system built by the Soviet
trade deficit has averaged 3% of GDP Union. The goal is to tap further
These nations tend to be Islamic and over the past decade. Turkmenistan’s sizeable gas reserves,
less politically and economically stable as well as Kazakhstan’s large oil
than China. They are seen as potential Moreover, China’s continued projected reserves. The newest pipeline will
sources of risk, particularly in Xinjiang fast growth means energy demand is pass through Khorgos, along the
province in China’s northwest. expected to continue outstripping Kazakh border, where China is
supply. The vulnerabilities of this currently constructing the world’s
Engaging these countries economically recurring deficit factor prominently in largest dry port.
and connecting them to western China the BRI.
through the BRI serves several In addition to supply diversification,
purposes: In physical security terms, there is another strategy would be to lessen
potential choke point at the Straits of China’s reliance on imported fossil
It improves economic outcomes in Malacca, roughly where Singapore fuels. China is moving aggressively in
these countries and lowers the risk of sits. Around 85% of China’s oil the areas of improving energy
tensions spilling over national borders, imports pass through the Straits of efficiency and adopting renewables —
in effect creating a buffer zone. Malacca, as well as about 50% of its in some cases spearheading the
gas imports. technology to do so – but demand for
It increases China’s sphere of fossil fuels is still expected to rise
influence. This means achieving Several of the early BRI projects strongly out to 2050.
better political alignment with directly address the vulnerability
neighboring countries, in tandem or as represented by the Strait of
a result of infrastructure and Malacca chokepoint: Venture Capital scheme
investment projects under the BRI.
The China-Pakistan Economic The BRI can be viewed as a VC fund with
It potentially creates a network of Corridor is one of the more advanced, a twist.
countries that use the Chinese and reportedly the biggest, BRI
currency, Chinese engineering project to date. The corridor involves Getting infrastructure financed and
standards, and where China plays a extensive energy and transport built has been a chronic problem for
dominant role amongst competing infrastructure projects that will link Asia Pacific. This is particularly true
regional and global powers. western China to the port city of in Southeast and South Asia. The
Gwadar on the Arabian Sea. Chinese Asian Development Bank (ADB) now
firms are converting Gwadar into a estimates that the infrastructure
Energy security multi-purpose, deepwater port. needs of Asia will exceed $22.6
trillion through 2030, in order to
A second driver of the BRI calculus is Recently built oil and gas pipelines maintain sufficient growth
energy security. China’s image as a from the Bay of Bengal traverse momentum. Over half of this will be
structural trade surplus economy Myanmar and terminate in the for power generation and about
does not apply to energy, where it runs western Chinese city of Kunming in one-third will be for transport.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 47
China’s Belt and Road Initiative
More importantly, the ADB sees an Multilateral development banks However, there are a number of
infrastructure funding gap – the including the ADB and World Bank have factors which suggest a better
difference between investment deep pockets and broad mandates to risk-return trade-off for China than for
needs and investment levels – of fund spending on public goods such as other creditors:
5% of GDP in the group of countries infrastructure.
excluding China. China’s gap is 1.2% Trade benefits. BRI projects will likely
of GDP. The sticking point has been the risk- make the recipient countries more
return trade-off. likely to trade with China (and use the
The funding gap is not an issue of supply renminbi), bringing economic benefits
and demand. There is no shortage of Construction risks, political risks (both beyond the project itself. The size of
infrastructure demand in the region, policies and expropriation), exchange markets for Chinese exports would
and the potential supply of longer term rate risks, commodity price risks and also increase.
investors, both regional and global, is environmental risks have made creditors
also ample. hesitant to commit longer-term funds. Energy security. BRI projects will
result in improved energy security for
Pension funds, insurance funds and As a result, infrastructure demand China as sources are diversified,
sovereign wealth funds all seek threatens to remain unmet, and bringing benefits beyond the narrowly
long-term assets to match their investment and growth will defined output of the project. The
long-term liabilities. correspondingly suffer. energy build out will also help develop
Moscow RUSSIA
Rotterdam GERMANY
NETH. Duisburg
KAZAKHSTAN
Almaty
Venice
Bishkek Huoerguosi
ITALY Istanbul
Urumqi Beijing
Athens Samarkand
Kashgar
TURKEY
Dushanbe CHINA
Lanzhou Xi’an
Tehran Islamabad
IRAN
PAKISTAN Zhanjiang
Fuzhou
Beihai
Gwadar Kolkata
INDIA Quanzhou
Hanoi
Guangzhou
Haikou
SRI
VIETNAM
LANKA
Colombo
Kuala MALAYSIA
Lumpur
KENYA
Nairobi
INDONESIA
Silk Road
Maritime Silk Road Jakarta
China-Pakistan economic corridor
48 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
China’s Belt and Road Initiative
and raise incomes in China’s poorer, In a bad outcome, the project company respected and preserved. In short, via
western provinces. may be holding an illiquid asset in a the BRI, they will need to buy into the
foreign country. notion of a Chinese-led, but not
Network benefits. China’s sphere of Chinese-dominated, Eurasian block.
influence across the region will The Chinese government is
increase as a result of BRI projects as investing seed money to fund Financial success can again be defined
both economic and non-economic ties infrastructure and industry along the lines of a venture fund. As
increase. This will provide in-network projects in the target countries. projects get up and running, Chinese
benefits as well as a buffer zone firms will attempt to amortize their
against outside influences. These target countries are the investment under the BOT model.
equivalent of early-stage or emerging Ultimately, the locals will take control.
firms in VC parlance. The objective is to
Investment returns reap returns from these investments, The key here is whether the project (and
cash out and exit. its spinoffs) will have long-lasting value
The Chinese government develops to the recipient country, or will just be
infrastructure under a build-operate- However, in a pure VC model the seen as an extractive exercise.
transfer (BOT) model. Once an financer would simply cash out and
agreement (concession) is granted by move on to the next emerging firm. In The composition of funding in the
the host government, the projects are the BRI model, the Chinese project latter stages of projects will be
built and financed mainly with Chinese company would also cash out, but important as well. Private sector
materials and labor. there is a clear expectation of an participation will signal that the BRI
ongoing relationship between the has created value in the initial stages,
A Chinese firm then operates the Chinese government and the and that the risk-return trade-off has
facility, usually for a period of 20 to 30 recipient country. improved to the point of being able to
years, splitting the proceeds with the attract private capital.
local counterpart or government.
Finally, at the end of the operating lease Success measures Success will also be determined by
period, the project is transferred to the how the BRI accommodates or
host government or entity. Success can be measured in terms of challenges the existing regional powers
soft power and financial sustainability. on the Eurasian supercontinent, as
The idea is that the costs of the well as the current global superpower,
project, including a target rate of Soft power boils down to winning the the United States.
return, can be amortized by payments hearts and minds of the recipient
during the lease period. countries. The objective here is to build Managing these relationships will
a network of commercial and political be a challenge, and this dimension
This is the intent, but it is not assured. alliances that will serve China’s broader of the BRI challenge should not be
geopolitical aims — regional influence underestimated.
There are a number of risks being and security.
taken by the Chinese project The cost of tensions is this area could
companies, including political risk Measuring this part of the success overwhelm gains generated elsewhere.
(including change, or change of view, of equation will be difficult since much
the government), technical or of it will be behavioral. Building Yet, if successful, the BRI will alter the
construction risk, market risk (inputs ports, road, bridges and pipelines geopolitical map of Eurasia, as well as
prices, interest and exchange rates) will be necessary but not sufficient. China’s economic and political relations
and income risk. with its neighbors near and far, for
Local populations will need at least to decades to come.
Ideally, the outcome is that the cost of feel that they have some say in the
the project is amortized and the Eurasian integration project and that Written in conjunction with S&P Global’s
Chinese project company is able to exit. their national identity is being both China Senior Analyst Group.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 49
China’s commodity exchanges
China’s commodity
exchanges
China is seeking to gain a role in global commodity pricing commensurate with its demand
for raw materials and boost use of the Yuan as an international currency of exchange.
US dollars are the “lingua franca” Rebar futures were launched on the
of international commodity trade, SHFE in early 2009 and the rebar
50 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
China’s commodity exchanges
futures contract is now the most DCE IRON ORE FUTURES: TRADED VOLUMES AND OPEN INTEREST
actively traded metals futures contract
Volumes (’000 mt) Open interest (’000 mt)
in the world. With “lot” sizes of just 10 180 3.0
mt, it enabled small players to 150 2.5
participate easily.
120 2.0
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 51
China’s commodity exchanges
their smartphones for cues to settle Unlike ICE Brent and Nymex WTI, which
physical prices. are light sweet contracts, China’s new
contract reflects mainly Middle
The DCE is opening up iron ore Eastern medium sour grades, which
contracts to international investors, account for 40%-50% of China’s total
and while futures trading will be crude imports.
priced and settled in Chinese
currency, it has added the lure of The contract has been long in the
allowing participants to make making, and, like Shanghai rebar and
deposits in US dollars. DCE iron ore futures, it can be
physically delivered.
The impact of financialization on the
iron ore market has been profound, but There is currently no Asian crude
critics lament the sharp intraday futures contract with the liquidity of
movements on DCE futures. Nymex WTI or ICE Brent. With China now
the largest importer of crude, the
Unable to easily access DCE iron ore, country hopes its contract will be more
international investors manage price reflective of China’s supply-demand
risk by hedging, using derivatives balance than either.
hosted on international venues like the
Singapore Exchange, where 95% of The ambition is to provide an Asian
these volumes are cleared. counterpart of equal standing to ICE
Brent and Nymex WTI futures.
52 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
China’s commodity exchanges
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 53
Finance and China’s ‘ecological civilization’
54 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Finance and China’s ‘ecological civilization’
participants, including banks, many variables that influence how these HOW ENVIRONMENTAL IMPACTS
institutional investors and insurance risks could affect aluminum COULD AFFECT INVESTOR RISKS
companies to stress test their portfolios manufacturers, such as the market Environmental impacts
would raise awareness of these risks price under the environmental tax and Direct operational impacts and indirect impacts
from supply chain such as GHG emissions,
and opportunities and provide trading schemes, and the degree of water use, air pollutions, etc.
additional momentum to China’s water scarcity in different regions. This
ecological transition. makes it difficult to properly assess and Environmental risks
Physical risks (eg. water stress, flood and drought)
forecast impacts on credit quality. and transitional risks (eg. regulation and
reputation); the channels that internalize impacts
into financial costs
Stress testing By defining the likelihood of these
developments, Trucost constructed Business risks
In 2017, Trucost conducted two scenario three scenarios to assess financial Financial impacts from environmental risks
affect businesses’ revenue, expenditure,
analyses to assess how changes in impacts on a number of sample asset values and so on
environmental policies and natural aluminum assets.
resource scarcity could affect credit Investor risks
Investment risks from the business risks
risk for Chinese financial institutions. experienced by investors
One was a study focusing on the Material risks
Source: Trucost
aluminum sector in China. Trucost
collaborated with the Industrial and After applying the above scenarios to
Commercial Bank of China (ICBC), one of sample assets in China, the analysis The potential for significant additional
the largest banks in China, to apply the shows that primary aluminum smelting costs from environmental regulations on
findings of its analysis in the bank’s and alumina production are most Chinese smelters is similar to the
internal rating model to understand the exposed to environmental risks under experience of their EU peers. A study
likely impacts on credit quality under all scenarios. published by the Centre for European
different scenarios. Policy Studies indicated that EU smelters
In the high-stress scenario, bore an additional average cost of 8% of
Trucost identified several key risk environmental tax appears to be the the aluminum market price owing to EU
factors relevant to the aluminum sector most prominent cost, which could add environmental regulations over 2002-2012.
in China, including environmental up to nearly 20% of the average alumina China’s new emissions trading scheme
regulatory compliance, environmental price (Yuan 3,065/mt) and 13% of the is similar to the EU’s, so their experience
taxation, emissions trading, water aluminum ingot average price (Yuan could be indicative for the impact of
scarcity and abatement costs. There are 13,190/mt) in 2016. emissions trading on Chinese smelters.
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 55
Finance and China’s ‘ecological civilization’
Opportunities minimizing growth in the sector’s greenhouse gas intensity than the cap
greenhouse gas emissions. likely to be allocated under an emissions
The results also show that Aluminum smelters around the trading scheme.
opportunities exist from these world have also started to view
transition scenarios. Secondary aluminum scrap as a strategic raw This is the result of active abatement
aluminum smelting, which relies on material to help minimize their by large Chinese smelters in recent
recycling post-consumed aluminum environmental footprint and reduce years, which saw China’s average
scrap as input material, has a operational costs. energy intensity per unit of aluminum
minimal internalized cost in all output become the lowest globally.
scenarios of regulatory change While primary aluminum is most Through selling surplus permits, some
given its much less energy-intensive exposed to financial risk resulting from smelters may be well ahead of their
production process and, thus, is potential changes in regulations, the peers in reducing exposure to hidden
exposed to less risk. results also show that the most energy costs resulting from possible changes
efficient assets may benefit from in regulation.
In fact, many jurisdictions see market-based environmental
secondary smelting as an regulations. Trucost’s research
important way to meet rising identified several assets in China that Aluminum sector
aluminum demand, while are operating with a much lower
These risks and opportunities
highlight the importance of financial
ESTIMATION OF INTERNALIZED COST IN HIGH STRESS SCENARIO institutions assessing their corporate
FOR SELECTED ALUMINUM ASSETS customers’ resource efficiency
(Yuan/mt) performance at the very beginning of
8000
the credit approval process.
6000
CAPEX Following this research, ICBC has
4000 Revenue at risk stress-tested their credit to the
Environmental
2000 tax aluminum sector against one of the
ETS cost most important risk factors
0 identified in the study – the
-2000
implementation of a nationwide
No With No With No With environmental tax in 2018.
abatement abatement abatement abatement abatement abatement
Primary aluminum Alumina Secondary aluminum
The wide range of taxable items
Source: Trucost
covered in this policy makes it difficult
for financial institutions to quantify
COMPARING THE ESTIMATIONS OF INTERNALIZED COST FOR A SELECTED their exposure.
PRIMARY ALUMINUM SMELTING PLANT IN CHINA
(Yuan/mt) The combination of Trucost data and
8000
the ICBC credit risk-rating model has
allowed ICBC to understand more
6000
materially the impact of emissions
4000
trading and the environmental tax on
aluminum companies in China in
2000 terms of probability of default and
No abatement changes in internal credit rating.
With abatement This will inform ICBC’s approach to
0
2018 2020 2022 2024 2026 2028 2030
risk management and capital
Source: Trucost allocation in the future.
56 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Finance and China’s ‘ecological civilization’
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 57
Add Insight
In a world that’s increasingly complex, competitive and fast moving, businesses need to stay a step ahead to succeed. As China
enters a new era in its development, the country’s policy direction has never been more important for the commodities industry
to understand.
This report brings clarity and transparency to the market with detailed examination of the landmark Belt and Road Initiative and
includes sections on key raw materials, global trade, the New Energy Economy, plastic waste and commodity exchanges.
We know that although data is key to decision making, information alone isn’t informative. Our in-depth analysis of the
challenges facing China’s policy makers will provide the insight needed to make business decisions with conviction.
S&P Global Platts provides unparalleled knowledge and experience which has already helped customers in 190 countries
interpret fluctuations, uncover new commercial opportunities and gain a competitive edge.
This report helps readers understand how China’s rapidly developing position will affect the global commodities market and how
S&P Global Platts can help you achieve your growth ambitions.
58 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Notes
© 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 59
www.platts.com
Category Left | support@platts.com
For more information, please contact the Platts office nearest you:
60 © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved. © 2018 S&P Global Platts, a division of S&P Global Inc. All rights reserved.