China's parliament ended the first session of the 13th National People's Congress on Tuesday, approving the 2018 economic and social development plan, including those tied to the energy and steel sectors.
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According to the development plan, China is keeping its GDP growth target at 6.5% for 2018, unchanged from last year. In 2017, China's economy grew 6.9%, exceeding the government's target.
Market observers said the government is holding on to a conservative target, as it aims to minimize financial system risks while keeping the world's second-largest economy stable. This is expected to make it difficult for an enterprise to raise loans for expansions, which will slow commodities demand growth.
The targets related to the energy and steel sectors were generally within expectations, as most of them were extended targets from the previous years.
The NPC is one of the most important political events in China, and in the latest session the nation's leaders for the next five years were nominated and plans to reorganize state institutions were approved. It was held in Beijing over March 5-20.
Here we outline some of the main commodity-related targets for 2018 and their potential impact:
* Improve energy efficiency by lowering energy consumption per unit of GDP by 3% year on year: This will continue to slow China's energy consumption growth. The National Energy Administration on March 7 set a tighter target -- lower energy intensity by 4% year on year. The NEA set the country's 2018 energy consumption target at 4.55 billion mt of standard coal equivalent, up 1.3% from 4.49 billion mt of standard coal equivalent estimated for 2017.
* Cut coal production capacity by 150 million mt/year: This does not mean China's coal output will fall in 2018, due to overcapacity in the country. National Bureau of Statistics data showed domestic coal production rose 3.2% year on year to 3.45 billion mt in 2017, despite significant capacity reduction in the year as more efficient coal mines lifted output to meet demand. The country eliminated 183 million mt/year of capacity in 2017 and 300 million mt/year in 2016, exceeding the original target of 150 million mt/year and 250 million mt/year for the two years, respectively.
* Shut coal-fired power generation units with capacity under 300,000 kW: This target is expected to have a limited impact on thermal coal imports. China has been closing less-efficient power generators with under 300,000 kW capacity since 2015 for environmental reasons, but China's thermal coal imports remain in an upward trend thanks to healthy economic growth and new infrastructure construction. The country's thermal coal imports rose 10.5% year on year to 187.82 million mt in 2017, following a year-on-year jump of 29.3% in 2016, General Administration of Customs data showed.
* Pursue "Blue Sky" and cut the number of haze days by half: This is expected to continue boosting gas demand and will also add to industries' operating cost, as they take steps to limit pollution. China has been fighting pollution by shifting from coal to gas, tightening transport fuel emission standards, shutting high emission steel mills, tightening environmental investigation and suspending plant operations occasionally in Beijing and neighboring regions. Apparent gas demand surged 15% year on year to 237.3 Bcm in 2017, compared to a 7% rise in 2016. NEA has targeted to boost the share of gas in total energy consumption to 7.5% in 2018 from 7% in 2017, while pushing down coal consumption to 59% from 60.4% last year. Tighter emission controls will lift steel mills' production cost, but the impact is unlikely to be seen until October 1, when a mandate requiring existing steel producers in and around Beijing to meet the special emission limits takes effect.
* Extend tax subsidies on clean energy vehicles for another three years: This will encourage sales of electric vehicles and have an impact on steel and transportation fuels. China sold 440,714 units of electric vehicles in 2017, up 82% on the year, compared to only 6,051 units sold in 2013. Conventional passenger car sales grew 1.9% year on year to 24.74 million units, slower than the increase of 15% in 2016. The slowing growth in conventional vehicle sales will cap growth in gasoline/diesel demand. However, demand for auto sheet will not see any notable upward momentum from new energy vehicles, because to some extent sales of these vehicles will just replace others for conventional vehicles.
* Cut 30 million mt/year of steel production capacity: This does not mean China's steel output will fall in 2018 as the target was set to eliminate surplus and less efficient capacity. NBS data showed that China's crude steel output increased 5.7% year on year to 831.73 million mt in 2017, when the country eliminated over 50 million mt/year of steel capacity. This target is likely to hit demand for low grade iron ore fines. China imported a record 1.07 billion mt of iron ore in 2017, up 4.9% year on year.
* Infrastructure investment: China plans to push the "Belt and Road" scheme, which will lead to rising investment on infrastructure and transportation along the belt from China to the rest of Asia, Europe and Africa, and will support demand for steel and gasoil for construction, and jet fuel and bunker fuel for transportation. Steel and gasoil demand will also find support from the government's plan to construct 5.80 million residence units in shanty towns. But some of this support in demand may be offset by lower investment in railway construction.
--Oceana Zhou, firstname.lastname@example.org
--Michelle Zhao, email@example.com
--Melvin Yeo, firstname.lastname@example.org, with Lucy Tang
--Edited by Geetha Narayanasamy, email@example.com