China’s plan to grow cleaner will be double whammy for commodities producers

Even as research done for The Wall Street Journal suggested that air quality in Beijing improved slightly last year, Chinese authorities were so disturbed by a TV documentary on pollution in the country that they removed it from websites.

Nevertheless, carbon dioxide emissions dropped last year, a remarkable feat for this coal-dependent nation. Slowing energy demand is good news for the environment, but not so much for those countries who have founded their economic success on supplying China with raw materials.

The Middle Kingdom’s voracious appetite has upturned global energy markets over the past decade. It accounted for nearly half of oil demand growth from 2000 to 2013. Since the early 1990s, its coal consumption rose by more than threefold, oil consumption quadrupled and gas use grew by more than a factor of 10.

Chinese oil executives turned up first in Khartoum and Astana, then Houston, Calgary and Moscow, to strike deals. Prices for oil, gas, coal and a host of other commodities –copper, aluminium, wheat – reached record highs in 2008.

But now Chinese energy demand faces two headwinds – the economy will grow more slowly, and that growth will be less energy-intensive. Commodity producers need to take warning.

The sharp fall in oil prices last summer has introduced a world where resources are more abundant than demand.

If China is to continue its dramatic ascent of the past three decades, it faces some daunting challenges: to transform its political system and sources of popular legitimacy; rebalance its economy from heavy industry towards knowledge and services; meet its still-growing energy needs in a more diverse and secure way; and clean up its clouded skies and waters.

All these endeavours will weigh heavily on energy demand. We might discount the possibility of the fall of the Communist party and a period of political upheaval, raised by the United States academic David Shambaugh in a recent Wall Street Journal article. An economic crisis triggered by a build-up of bad debt and overinvestment has been repeatedly predicted, but so far avoided.

The economy, however, has already shifted on to a slower track – after regularly recording double-digit growth up to the global financial crisis, expansion from now on is more likely to be about 7 per cent or less annually.

The president Xi Jinping’s new growth strategy advocates a shift away from infrastructure and heavy industry towards higher value-added manufacturing and services. The government has already acted to reduce overcapacity in steel making, cement and coal mining, with coal consumption planned to be capped by 2020 just 10.5 per cent above today’s level.

Energy efficiency is being stepped up, with car mileage standards more stringent than that of the US, and higher taxes on fuel use. Less coal use means less diesel consumed to haul it around the country. Natural gas, renewables and nuclear power are slowing the growth of coal-fired power.

Might other countries take up the slack? India, now the fastest-growing large economy, is the obvious candidate. But its oil consumption is now only where China’s was in 1996. For a host of reasons – a more open political system, less industrialised economy, and higher population density – it seems unlikely that India will record the relentless economic and energy demand growth that China did.

Africa, which uses about as much oil as India, is even further behind in the phase of resource-intensive industrialisation, and with growth very unevenly distributed.

Slower growth in China’s use of resources is bad news for miners of coal and iron in Australia, Indonesia and Brazil, and oil producers in the Middle East, Russia, the Caspian Sea area and Venezuela.

Of course China will continue to be a major – probably the major – influence on world oil demand. But it will no longer be the global energy consumer of last resort. Indeed, there no longer is such a consumer.

Robin Mills is the head of consulting at Manaar Energy and author of The Myth of the Oil Crisis

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