Mining policy reforms to take back seat at Chinese leadership meetings

As China's top legislators and political advisers gather for the National People's Congress and the Chinese People's Political Consultative Conference in the week of March 5, analysts expect that this year's policy updates — especially in the realms of industry-wide capacity cuts and environment protection — will weigh on the mining sector less than they did in the past.

Reduction in capacity for industries such as coal and steel, which has been a focus in previous annual government work reports presented by Chinese premier Li Keqiang during previous years' sessions, will take a back seat this year, according to Helen Lau, a metals & mining research analyst at Argonaut Securities.

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Premier Li Keqiang speaks during a press conference after the annual meeting of National People's Congress in March 2017.

Source: Associated Press

"There would not be any surprises in terms of capacity cut targets [for the mining sector]," Lau said, noting that Chinese authorities have said it would complete its reduction target for steel this year, two years earlier than originally planned, and it is on track to reduce 500 million tonnes of coal capacity by 2020.

The nationwide capacity-cut program for steel and coal was announced by the central government in early 2016 when the two industries had been suffering from overcapacity and slowing demand. In addition to the compulsory capacity-reduction targets, Chinese authorities also rolled out measures such as capping the number of annual working days of coal projects to 276 from 330 in 2016 and ordering temporary production suspensions at steel plants and coal mines for environmental checks.

This has helped to prop up prices in affected commodities as well as producers' earnings. Newcastle coal price had averaged at about US$53 per tonne in 2015 before the Chinese capacity cuts. It then surged to an average of US$97 per tonne in 2017, according to data from S&P Global Market Intelligence.

Lau also said that regulators are unlikely to launch capacity reduction targets for other minerals. "The impacts would not be as significant as what they were for the iron, steel and coal sectors."

However, supply-side reform is expected to bite into sectors outside mining, such as in manufacturing and environmental protection industries, according to a Chinese economic analyst, who declined to be named.

"Supply-side structural reforms have yielded positive results for the steel and coal markets, and remains at the center of China's economic and reform agenda over the long term," the analyst said, noting that more supply-side reforms could be expected in the next five to ten years.

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President Xi Jiping speaks at the opening ceremony of a Communist Party of China meeting in December 2017.

Source: Associated Press

The upcoming "Two Session" meetings will mark the first gatherings of legislators and political advisers during President Xi Jinping's second term, shortly after Chinese authorities in late February proposed eliminating a two-term limit on the presidency, which will pave the way for Xi to rule beyond 2023.

The macroeconomic analyst expected to see strong policy continuity in the country, along with more deleveraging and environmental protection initiatives. "China is aiming for quality and sustainability of development, rather than GDP expansion," the analyst said.

The analyst added that the GDP growth targets set by Chinese provincial governments for this year are generally flat or lower than the targets posted for 2017, and only about a third of the 31 provinces have higher targets than 2017.

Argonaut Securities' Lau agreed that China will prioritize quality growth over GDP targets, but remained optimistic on China's demand for commodities as the economy continues to grow.

While the success of China's environmental drive has surprised the market, Lau believed that commodity prices would be much less sensitive to environmental regulations this year.

"Environment protection remains as a key driver in reinforcing the supply-side reform but we expect markets to be less volatile," Lau said.