China`s War on Smog Sends Shivers Across Commodities Sector

TEMPO.CO, Beijing - China's crackdown on exhaust-spewing factories that shut or slashed output this week at sites including steel mills, textile and cement factories and coal-fired power plants will ripple across major bulk commodity markets into 2017.

City and regional governments shut thousands of plants in China's industrial heartland, from Hebei province that surrounds Beijing to Shandong southeast of the capital, to combat smog that blanketed the country's north for five days this week. Many plants reopened on Thursday as winds cleared the polluted air.

But closures on this scale could put the brakes on China's better-than-expected output of major commodities, hurt demand for raw materials, like iron ore and coal, clog global supply chains and get business for the world's second-largest economy off to a subdued start in 2017.

"It does present a downside risk to commodity prices in the short run," said Paul Bloxham, chief economist for global commodities, Australia and New Zealand, for HSBC Bank in Sydney.

There are few precedents for 24 Chinese cities issuing pollution red alerts, the highest possible level of warning, that forced the sudden closure of schools, highways, ports and some airports and hobbled manufacturing.

Previous industrial shutdowns at steel mills and petrochemical plants, such as near cities like Hangzhou in Zhejiang province to ensure blue skies before the high-profile G20 summit in September, were made in advance and gave operators time to prepare.

Heavy industry was already feeling the effects of years-long measures by China, the world's top steel and base metals producer, to shut excess capacity and clean up the bloated, polluting sector.

The smog-induces shutdowns have hammered Chinese commodity futures this week.

Iron ore for delivery in May on the Dalian Commodity Exchange is set for a 9.3 percent drop this week, the biggest weekly decline since May. Steel rebar is poised for an almost 11 percent fall and slipped to a three-week low of 2,992 yuan ($430.57) per ton on Friday. Industrial coke slumped almost 4 percent to a seven-week low of 1,634 yuan per ton on Friday.

However, HSBC's Bloxhom believes China's ongoing supply-side reform, which has tightened supplies and boosted bulk commodity prices, including coal and iron ore, in recent months, will help support the long-term market.

Pollution alerts are frequent during the winter when energy demand, largely coal-fired, soars. Northern China is bracing for a smoggy Christmas weekend, with the air quality forecast to deteriorate again on Saturday before improving on Monday.

But events like this week could become more regular if the government ramps up its years-long war on pollution, putting the hot-button social issue ahead of business.

Curbing pollution has become a key part of upgrading the economy by shifting away from heavy industry and tackling overcapacity amid concerns about China's global reputation and its future development.

Beijing is now under increasing social and economic pressure to deal with the chronic hazardous air amid concerns about the damage to people's health.

CONGESTION AND DISRUPTION

Orders handed down by Beijing, the port of Tianjin, and the industrial cities of Heze in coal-rich Shandong and Handan in Hebei give a glimpse into the magnitude of the disruption to industrial activity and the demand for critical raw materials.

More than two dozen coal-fired power plants, 54 steel mills, and more than 100 construction and cement firms were ordered to either shut or slash output, the orders showed.

On Friday, Tianjin, China's second-largest port by cargo volume, was still congested as vessels started discharging cargoes held up by a suspension by at least three days of coal and iron ore loadings.

The port on China's east coast is the key hub for the trading of 100 million tonnes a year of seaborne coal and domestic coal that flows south from Inner Mongolia.

"It's not the worst smog I've seen, but the longest in my region. The worst smog happened two years ago, but it didn't last more than 24 hours," said a coke trader in Tianjin.

REUTERS