China has become one of the largest global consumers of commodities, and the Asian giant's appetite for oil, gas, metals and other commodities is showing little sign of slowing down. Citi Research released a report on the China commodity sector on Monday, and lead analyst Ivan Szpakowski and colleagues laid out "10 areas to watch in China commodities."
Government environmental initiatives
Szpakowski highlights that environmental concerns are in the spotlight in China today, particularly in coal and steel industries, where much stricter regulations took effect in 2013. There is still a lack of leadership from the top Chinese leaders on the issue, but mid-level officials are actively pushing for greater regulation and enforcement of current regulations.
China's steel overcapacity issues
Overcapacity is a stated priority of China's new government, and it seems initial steps are being taken taken to address overcapacity in the steel sector. Assuming a reasonably successful implementation of the steel industry retrenchment, similar initiatives in other industries are likely.
Tight credit and local government debt issues
Financialization of commodities
Commodities are being used as collateral for financing or even to invest in real estate in China today. Financial products based on gold are also mushrooming, and a slew of new futures contracts are scheduled for 2014, including crude oil and HRC.
Rising real estate prices
Housing prices are becoming a serious problem in China, especially in the largest cities. The report argues that the government is likely to take further cooling measures, which could result in less overall development activity in 2014.
Continued trend toward urbanization
Urbanization is perhaps the most powerful driver of Chinese commodities demand. Continued land reform and progress in residence permit liberalization are important trends to watch, with clear progress seen in the former but the latter remaining limited.
Increased refining capacity
Over the last six or seven years, China has enjoyed a large-scale expansion of its oil, copper, and aluminum refining capacity. This is turning China into an exporter of refined petroleum products, copper cathodes and aluminum products, at least in some areas of the country.
Indonesia export ban
Szpakowski also highlights nickel pig iron as a market to watch closely in 2014. "China’s nickel pig iron industry is set to be hit hard over the coming months. Chinese firms will also need to source additional bauxite and alumina, and the ban may slow the rapid expansion of aluminium smelting capacity."
Related to the above, China is increasingly importing raw materials and exporting refined commodities, and this directly relates to the environmental problems the country is facing. The Citi Research report also mentions that China’s trade regime is liberalizing a number of markets, including gold, oil and copper.
Factor price reform
Finally, the report highlights that reforms of China's commodity price setting mechanisms are anticipated in the oil, natural gas, electricity, soybeans, cotton and water markets.