Join our community of smart investors

China's five-year plan promises radical shift

China's emissions look set to keep rising, but President Xi Jinping has committed to cutting CO2 intensity and ramping up low carbon energy generation.
April 6, 2021

US President Joe Biden unveiled the long-awaited infrastructure plan last month, worth $2tn (£1.45tn). A surge in US building, covering roads, railways and airports, looked a likely catalyst for metals prices improving, given the uptick in demand to come from such a large programme.

Yet traders just “shrugged their shoulders”, according to one analyst.

The real game is across the Pacific in China, where in the short term building could slow as stimulus lending and spending comes down. In the long term, the greening of the economy plans could spark even more growth.

This is nothing new, with China accounting for half of all metals demand. It will also need to spend over $6tn in new power generation capacity as part of its net zero carbon emissions by 2060 plan, according to consultancy Wood Mackenzie, as it also needs to account for a forecast increase in energy demand of three-quarters. 

Global politics are also having an impact. China showed last year it would react to foreign governments speaking out about its actions, be it in regards to Covid-19 or what the US is calling a genocide in Xinjiang province. 

 

Best laid plans

In March, the National People’s Congress approved the country’s 14th five-year plan, covering 2021 to 2025. This has both ‘anticipatory’ and ‘mandatory’ indicators, covering development signals such as urban/rural population split, for example, which is forecast to hit 65 per cent urban from 60.6 per cent in 2019. That is an increase of around 100m people by 2025, using the forecast population growth rate of 0.4 per cent. 

Even with its massive building spree of the past 20 years, there is seemingly still more to do. This kind of building will drive steel, copper and cement demand, among others. Alongside continuing urbanisation, the plan looks at rural infrastructure as well. One for the niche metals followers is the 5G rollout. 

BMO Capital Markets said 700,000 5G base stations were installed last year and this could hit 1.5m in 2021. On top of increasing silver demand, this is positive for iridium, a platinum group metal (PGM), which hit an all-time high of $6,000 an ounce (oz) last month. 

Yet more important for those selling commodities to the country, the government has set a target of reducing CO2 emission per unit of GDP by 18 per cent, and a cut to energy intensity per unit of GDP. These are both mandatory. 

Bernstein analysts said another key part of the plan was bringing forward the aim of non-fossil fuels accounting for a fifth of the primary energy mix from 2030 to 2025. These targets apply on a provincial level as well. 

BMO Capital Markets managing director for commodity research Colin Hamilton said last month this meant everyone would pitch in. “If you're a provincial official, and you want to move up the chain, well, you'd better meet your carbon emission reduction targets,” he said. 

Yu Wang at Bernstein argued solar and wind would dominate the non-fossil fuel goal given President Xi Jinping’s preferences, the lack of realistic new hydroelectric options and local opposition and “lack of proper sites” constraining nuclear expansion. The government has still got a plan to increase nuclear output from 50 gigawatts (GW) to 70GW between now and 2025, although Bernstein said this was slower growth than expected. 

So overall, China is planning a rapid increase in renewables and less energy intensive growth. 

 

Sourcing 

Wood Mackenzie said in March a key plank of the net zero carbon plan was greater energy and metals independence. China imports over three-quarters of its oil, iron ore and copper supply. 

These amounts are globally significant in terms of commodities prices, with China consuming just over half the world’s copper output every year and dominating steel production. Iron ore prices have been above $80 a tonne (t) for over two years now, meaning huge profits for miners.  

China also needs large amounts of cobalt, nickel and other battery metals for its huge electric vehicle industry. The country has plenty of its own rare earth elements, used for EV motors and in wind turbines, as well as lithium and graphite supply. 

These needs are already being fuelled in part by equity stakes outside China. Government-owned companies have been buying up copper mines and stakes in lithium operations for years. 

WoodMac painted a picture of global powers competing for raw materials even more than in the past. “For Beijing, energy independence and decarbonisation are inseparable: by winning the clean-energy race, China can cast off the shackles of its reliance on others and dominate the resources and technologies the world needs to decarbonise,” a team of analysts said in a March report. 

Biden has made independence one of the goals in the $174bn EV package in his big infrastructure plan, which will “enable automakers to spur domestic supply chains from raw materials to parts, retool factories to compete globally, and support American workers to make batteries and EVs”. 

Right now 

Huge goals seem more accessible when an autocratic state announces them. Biden’s $2tn effort, which is separate to the $1.9tn Covid-19 relief plan, faces a challenge getting through the Senate because of Republican opposition. 

However, even if Xi has no opposition to those goals, there are still challenges. Just finding enough raw materials to keep building the infrastructure needed for net zero will be tough enough, even with Chinese companies buying up assets around the world. Outside China, governments are challenging its behaviour in Xinjiang and Hong Kong more than ever, and this could see its key components for EVs and renewables become tougher sells for carmakers and companies concerned about social responsibility. 

The other angle is China cutting off other countries. It blocked trade with Australia after the government there sided with Donald Trump over an investigation into a Wuhan lab that he said could have been the source of Covid-19. China blocked wine, coal and grain imports in response, although allowed iron ore imports to continue. 

In the short term, metals prices are likely to dip as the massive Covid-19 recovery programme ends. The government has already started putting the brakes on and copper has dropped off its decade-long highs close to $10,000/t. Iron ore has held on, however, and a supercycle could drive these metals to fresh record highs beyond 2021.