China’s pollution crackdown: a secular tailwind for the global natural resources sector

11/01/2018

Download

David Whitten, Head of Janus Henderson’s Global Natural Resources Team, discusses the significance and implications of China’s crackdown on its worst polluters, which is creating attractive opportunities for many global commodity suppliers.

In 2013, the Chinese government revealed plans to clamp down on factories causing high levels of pollution, with the aim of reducing emissions from polluting industries by 30% by the end of 2017. This commitment was reinforced in October 2017 at the 19th National Congress of the Communist Party, where the Chinese authorities pledged to cut air pollution concentrations by 34% by the year 2035. These pledges have resulted in the inspection and closure of a large number of factories across the country, reducing supply, increasing prices and enabling foreign producers to fill the market gap and capitalise on the situation.
 
Sector implications
 
Steel
 
Capacity is being cut back to reduce marginal high-cost, high-pollution production, leading to a reduction in steel exports and in turn better prices in the US. The closure of uneconomic steel plants and their auxiliary businesses has created some unusual opportunities. For example, merchant supply of excess oxygen to industry is no longer available, meaning larger suppliers of oxygen are no longer being undercut on pricing. This means companies such as  Air Products & Chemicals in the US − already the most profitable industrial gas producer in the world are enjoying higher prices in China for the first time in years.
 
Iron ore
 
Steel production cuts are being implemented through the heating season (northern hemisphere’s colder months from November 2017 to March 2018), which may see iron ore demand reduced significantly. However, the ramifications are not all negative since high grade ore is required to maximise production from the steel sector at a time when prices and demand are high. The higher grade producers such as Rio Tinto and BHP are likely to benefit from premium pricing and the maintenance of sales volumes at high levels, which may largely counteract weaker iron ore pricing.
 
Aluminium
 
Illegal production facilities and energy-inefficient smaller operations are being closed throughout the heating season. These initiatives have been implemented quicker and larger than expected by the industry, and consequently global supply has moved into balance. The cutbacks have already been significant, resulting in a recovery of the aluminium price from US$0.80/lb to almost US$1.00/lb. Rio Tinto, the world's second largest producer, has already been a major beneficiary from the Chinese cuts. 
 
Zinc
 
After many years of declining global production, we have seen zinc stocks steadily decline and prices improve markedly. But unlike previous cycles, smaller Chinese producers have not re-entered the market due to government controls to restrict pollution. Tighter supply and rising prices are likely to benefit companies such as Glencore, Teck Resources and New Century Zinc, held in the Janus Henderson Global Natural Resources portfolios.
 
Liquefied natural gas
 
China imports are already higher than a year ago with a visible shift from coal to gas underway. New demand from China is likely to absorb the majority of new global production as the nation pursues its anti-pollution targets.
 
Renewables
 
Opportunities in the wind subsector continue to expand at a rapid pace. This is creating potential growth options for companies like Vestas, the world's largest and most diversified manufacturer of wind turbines.
 
Additional tailwinds in China for resource companies
 
Water scarcity
 
China has 22% of the world’s population but only 6% of the water, which has big implications for agriculture, food production and health. Companies in the water treatment sector are likely to see growing demand for services in line with consumption and population growth.
 
Biofuels adoption
 
China intends to blend ethanol, a plant-derived biofuel, into its petrol mix by 2020. This action has the potential to increase China’s annual ethanol consumption from 2.6m tonnes to around 12m tonnes, creating opportunities for international corn exporters and agricultural suppliers.
 
The shift to electric vehicles
 
China is expected to move towards predominantly electric vehicles (EV) by 2030-2040, which will have massive implications for the battery market. The battery raw material supply chain is already working overtime in the lithium, copper and cobalt sectors to prepare for a surge in initial demand from 2020 onwards.
 
A clean conclusion
 
China’s commitment to a cleaner, healthier and safer environment has broad implications and offers the potential for attractive investment opportunities. Given the strong levels of adherence the nation has demonstrated to commitments historically, we see this far-reaching theme as a long-term secular tailwind for the global natural resources sector.

Note: Stock examples are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Global Natural Resources Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03 / 04 CapitaGreen 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Share

Invest in the power of disruption

Powerful themes are shaping, and being shaped by, disruption.

Click to read our investment managers’ insights.



Related funds

Classifications

Important message