China's crackdown on exhaust-spewing factories that shut or slashed output this week at sites including steel mills, textile and cement factories and coal-fired power plants will ripple across major bulk commodity markets into 2017. City and regional governments shut thousands of plants in China's industrial heartland, from Hebei province that surrounds Beijing to Shandong south-east of the capital, to combat smog that blanketed the country's north for five days this week. Many plants reopened on Thursday as winds cleared the polluted air.
But closures on this scale could put the brakes on China's better-than-expected output of major commodities, hurt demand for raw materials, like iron ore and coal, clog global supply chains and get business for the world's second-largest economy off to a subdued start in 2017.
"It does present a downside risk to commodity prices in the short run," said Paul Bloxham, chief economist for global commodities, Australia and New Zealand, for HSBC Bank in Sydney. There are few precedents for 24 Chinese cities issuing pollution red alerts, the highest possible level of warning, that forced the sudden closure of schools, highways, ports and some airports and hobbled manufacturing.
Previous industrial shutdowns at steel mills and petrochemical plants, such as near cities like Hangzhou in Zhejiang province to ensure blue skies before the high-profile G20 summit in September, were made in advance and gave operators time to prepare. Heavy industry was already feeling the effects of years-long measures by China, the world's top steel and base metals producer, to shut excess capacity and clean up the bloated, polluting sector.
The smog-induces shutdowns have hammered Chinese commodity futures this week. Iron ore for delivery in May on the Dalian Commodity Exchange is set for a 9.3 percent drop this week, the biggest weekly decline since May. Steel rebar is poised for an almost 11 percent fall and slipped to a three-week low of 2,992 yuan ($430.57) per tonne on Friday. Industrial coke slumped almost 4 percent to a seven-week low of 1,634 yuan per tonne on Friday. However, HSBC's Bloxhom believes China's ongoing supply-side reform, which has tightened supplies and boosted bulk commodity prices, including coal and iron ore, in recent months, will help support the long-term market.