***Correction: The total output of the seven power plants that use coal for power generation in Beijing, is 25.6 billion mWh of electricity, as noted in the link to CARMA. Hat tip to CrossProfit for pointing this out***
With the recent news of China taking drastic measures to reduce air pollution during the Summer Olympics, there will be an impact on the price of commodities. This is a risk potential since China is a large consumer of commodities. According to Beijing Summer Olympic Committee news, Du Shaozhong, the deputy director of the Beijing Environmental Protection Bureau (BEPA) has outlined more details on the temporary but drastic measures, in and around Beijing, to bring air pollution down to an acceptable level.
List Of Planned Restrictions
Complied from Associated Press (AP), Guardian (G), and the New York Times (NYT), here is the list of measures that BEPA will take to reduce air pollution during the Summer Olympic games:
- AP: All digging and pouring of concrete on construction sites will be suspended from July 20-Sept. 20
- G: Any construction projects not scheduled to have completed excavations and concrete placement as well as site "greening and coverage" by July 20 will not be allowed to start work.
- AP: 19 heavy-polluting companies are to cut their emissions by 30% from July 20-Sept. 20, including:
- G: several plants run by Shougang Steel (aka Capital Steel Group) in west Beijing, the city's worst offender
- G: Yanshan Petrochemical Group
- G: Jingneng Thermal power company and three other coal-burning plants
- G: Copper cable producers in the Beijing area
- G: Number 27 Locomotive Factory.
- G: several plants run by Shougang Steel (aka Capital Steel Group) in west Beijing, the city's worst offender
- G: Eastern Chemical Plant of Beijing Eastern Petrochemical Co will stop production for two months
- AP: Coal-burning boilers that fail to meet emission standards will be closed (according to CARMA, Beijing has 10 power plants, of which seven are coal-fired)
- AP: Production would be stopped at cement plants, concrete mixing plants, and cement grinding plants in southeastern Beijing
- AP: Quarrying operations will be stopped
- AP: Gas stations, oil depots and tanker trucks would cease operations unless equipped with "oil vapor recovery" technology
- NYT: More than half of Beijing’s 3.5 million cars and trucks will most likely be off the road for the full duration of the Olympic
- AP: Five provinces and municipalities surrounding Beijing (city of Tianjin; Hebei, Shanxi and Shandong provinces and Inner Mongolia region) will also be shuttering factories, although their plans were not released.
Construction expenditures in China, which topped 2.2 trillion yuan (US$267 billion) in 2003, is still going strong with expenditures forecasted to rise 8.8% annually through 2011, according to Freedonia Group Inc., a major business research firm. So in the long term, commodities prices will be well supported by China’s growth, which is still racing ahead. (The Economist is forecasting China’s real GDP growth to be 9.6% in 2008 and 9% in 2009.)
However, in the short run, particularly the months leading up to the Beijing Summer Olympics, there is a risk of substantial fluctuation in commodities prices as more people begin to fully grasp the consequences of the air pollution crackdown in Beijing, nearby provinces, and municipalities.
Commodities That May Be Affected
China is the world's largest importer of cotton, copper and soybeans and the second-largest importer of oil, according to Yale Center for the Study of Globalization. While China’s commodity imports are expected to rise at double-digit rates until 2020, the Summer Olympic should provide a bit of a pause from the current growth, which have been 10 times higher than the average import growth rates for the rest of the world.
Coal: Price Decline Anticipated
In Beijing, there are seven power plants that use coal for power generation, according to CARMA. These seven power plants generate 25.6 billion mWh
Cement & Other Building Material: Price Decline Anticipated
China is already exporting building materials, including cement. With the construction stoppage in Beijing, and planned in five nearby regions and municipalities, for two months, the building material that were destined for Beijing (and nearby regions and municipalities) will be diverted elsewhere, increasing the supply of building materials temporarily. This will have a short-term downward pressure on the prices of cement and building materials. Once the Beijing Summer Olympics is over, this trend should reverse itself as China continues on its torrid growth rate.
Steel: Price Increase Anticipated
Shougang Steel (a.k.a. Capital Steel Plant), a part of the Tangshan group and China’s fourth largest steel maker, produced 12.48 million metric tons of steel in 2006. With the current global steel shortage (also see here), the reduction of Shougang Steel’s production out of its Beijing location -- 2007 production of 6.5 metric tons, or 1.1% of global supply -- will have an immediate impact on global steel prices.
Source: Steelonthenet.com
Oil And Auto Fuel: May Not Be Affected
Even with the plan of removing nearly 1.25 million vehicles from the road during the Summer Olympics, it may not do much to sway the price of oil. Assumptions: (1) 1.25 million vehicles will be removed, (2) for two months, and (3) each vehicle consumes 5 gallons of fuel per day. Based on this assumption, a total of 375 million gallons of fuel -- equal to approximately 6.2 days of fuel consumed by U.S. drivers -- would be available for other uses. Since coal burning power generators may be offline or running at reduced capacity, this fuel may be diverted to generate electricity elsewhere or stored in strategic fuel reserve for future use.
Ethylene: No Material Affect
Yanshan Petrochemical Group is a producer of ethylene, a product of which China is a net importer. However, the 30% reduction in production of ethylene will not have no material effect on the ethylene market, which is expected to soften going into 2009, as more ethylene producing plants come on line in the Middle East.[iii]
Conclusion
I have listed some of the commodities that may be affected by Beijing’s crack down on air pollution during the Summer Olympics. However, as more information filters out, especially that of the nearby provinces and municipalities, revision to the above projections may be required. If Beijing stands firm on its crack down, then a short-term movement of commodities, as outlined, may be expected.
May your trading be profitable!
Regards,
Ed Kim
riskyops.blogspot.com
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[i] Electricity generated per ton of coal is 0.4 x 6,150 kWh or 2,460 kWh/ton. This was used to calculate the total short ton of coal used (source: http://science.howstuffworks.com/question481.htm)
[ii] Calculated at 2 months supply of coal for the seven power plants x 30% reduction (10,424,366 tons of coal / 12 months x 2 months X 30%)
[iii] http://www.dri-wefa.com/Perspective/PerspectiveDetail10830.htm Sphere: Related Content
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