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 Air Pollution concerns

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.

China Steel Capicity

Tight credit and local government debt issues

The report also suggests that credit will remain tight for at least the next few quarters in an effort to rein in the “shadow banking” sector. The analysts also point to increasing scrutiny on local government debt as a factor in slowing down infrastructure and real estate demand.

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.”

Trade flows

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.