China Research

Currently, the UN Climate Change Conference is taking place in Doha. The objective of this conference is to make plans from the Durban meeting one year ago concrete. This means more detailed that a global climate treaty should be set up by 2015 and be implemented by 2020. The whole issue of the deteriorating global environment is getting more urgent each and every year. In fact, there is no time to lose.

However, the situation still seems to be paralyzed after the failing climate summit in Copenhagen three years ago. In the meanwhile, carbon dioxide (CO₂) emissions continue to increase rapidly. China’s CO₂ emissions are now almost twice as much as those of the U.S. which means an increase by almost 300 percent since 1990 (the U.S. +9 percent during the same period, India and Indonesia +200 percent, Germany and the UK -20 percent). According to most calculations, China stands now for 25 percent of all global CO₂ pollution, mainly related to the rapid industrial expansion and the predominant use of carbon for energy production (75 percent).

Just looking at this very brief statistical summary points at the ongoing environmental conflict between China, other emerging countries and most Western interests (but the U.S. never ratified the Kyoto agreement). Emerging countries are – in line with their term – expanding their economies quickly, and actually more quickly than the rest of the world. Since these countries consider the West / Western countries to have a kind of historical debt for their lagging development, the group of emerging countries – informally led by China and India – does not consider their absolute volumes of pollution as the decisive reduction indicator – but the pollution or GDP per capita.

Regarding historical or emotional dimensions, this kind of approach may look understandable. But relative calculations tend to be misguiding when absolute numbers become really high. This is why China’s role in the long way to better global climate conditions has to be regarded as both decisive and morally important, particularly since China can be supposed to remain a rapidly growing economy also in the foreseeable future – even in the case of temporary growth distortions. In other words: China’s responsibility for the global environment will continue to increase. Thus, calculations based on per-capita measurements will become more and more obsolete. However, Western interests should negotiate with China on fact-oriented levels – and not with arrogant and superior attitudes!

Finally, it should be said that also China itself would benefit from a clearly improved environmental outlook at home. Its people will be happier, more healthy and more productive – which certainly will add to economic growth in the longer run.

Summary: It will be one of the most important strategic decisions of the new Chinese political leadership to give the long-term objective of a substantially improved environment enough priority compared to short-sighted growth considerations.

Hubert Fromlet
Professor of International Economics
Editorial board

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Today, China dominates the global commodity markets by its strong demand for oil, metals and agricultural commodities. China is not only consuming an increasing portion of ores, fuels and food, but is also an important supplier of a lot of commodities, e.g. rare metals, coal and some special metals.

We can illustrate China’s role by a closer look at the world steel market. The worldwide steel production has recovered more rapidly than initially expected. In 2011, production amounted to about 1.53 billion tons of crude steel worldwide. For 2012, we forecast a crude steel production of around 1.55 billion tons. We expect a further increase of up to 1.75 billion tons for 2015. This development enhances the demand for iron ore, blast furnace, coke and steel scrap. Important impetus continues to come from China and other Asian regions. China’s output will be up to 720 million tons in the current year and close to 800 million tons in 2015. This equals the global production level of the mid nineties!  In addition, we see rising production volumes in India, Vietnam and Indonesia.

On the other hand Western European steel production is still below pre-crisis level and will only stagnate in 2013  while some Eastern European countries will show a stronger growth during the next years. Within Europe Turkey could reach a new all-time high with a production volume of up to 38 million tons in the current year. For 2015, we expect a volume of more than 40 million tons.

To fulfill the needs of the output highs of the global steel industry new capacities for iron ore are necessary. About 70 per cent of the worldwide iron ore reserves are hold by three companies (Vale, BHP and Rio Tinto). Together with capacities of Anglo-American and the captive capacities of ArcelorMittal they control the worldwide supply of iron ore. Compared to our steel production forecast another 450 million tons of iron ore per year will be needed in 2015.

Today China influences the spot market price for iron via its tremendous demand. The leading iron ore producers invest mainly to fulfill Chinas needs, e.g. Vale ordered new vessels with higher capacities ever seen primarily for the transport of iron from Brazil to China. Beside steel China holds a nearly similar position  in the markets for aluminum, copper, nickel and zinc as well as the casting of these metals. In the long-run China will become the main consumer of oil instead of the United States.

The country is the leading producer of rare metals with a production share of 97 % in 2010, needed in high-tech applications worldwide. Restrictions for exports of these rare metals via tariffs or volume constraints are not unusual in China. And even in the medium-term countries outside of China are unable to substitute these raw materials or find other suppliers. This will result in a rising production of high-tech application within China. Therefore, Western companies discuss more and more joint ventures in China to secure their raw material supply.

During October 2012  China announced a further restriction for the export of copper scrap. Holding the scrap in the country improves Chinas resource base, because it is the leading copper user worldwide.  Outside of China the reduced scrap supply  induces higher prices for scrap and via higher input costs in a second step  higher prices for secondary and primary copper. In addition, there are high inventories of copper in the Chinese  warehouse of the SHFE and higher strategic reserves of copper.

These are only a few examples for the rising importance of China in the commodity markets. But does this behavior result in an optimal allocation of resources? In our opinion it does not. With a completely free trade of commodities the market would chose the best location for the production of goods via the price mechanism. Restrictions for free trade induce higher prices than necessary.

Heinz-Jürgen Büchner
Vice President Economics and Research, IKB Deutsche Industriebank

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