China's attempts to reduce pollution will be a major driver of commodity demand in the near and long-term, and deliver a boost in demand for "green" commodities used to make electric vehicles and renewables, according to a new report from investment bank UBS.
UBS, which is monitoring air quality records from more than 2100 locations in China, says air pollution in cities affected by the winter industrial closures is ''clearly better'' than in winter last year.
But UBS flags further action from Chinese authorities to curb pollution, if air quality deteriorates over winter.
''We expect China's action to steepen cost curves, to result in further closures, and to boost demand for "green" commodities used in renewables, EVs (electric vehicles) etc,'' the UBS report said.
The Chinese pollution crackdown is both a positive and a negative for Australian miners. It is a negative for Fortescue Metals Group, because it has been exacerbating "discounts" being applied to its iron ore as Chinese steel producers increasingly select iron ore with a higher iron grade than Fortescue's.
But other major iron ore producers such as BHP and Rio Tinto, whose iron ore has a higher iron grade, are "relatively well positioned'', UBS said in a separate recent note.
The investment bank also highlighted a recent regulatory change in China that could lead to increased pollution, and in turn lead to more cuts to industrial production. China's Ministry of Environmental Protection recently allowed cities and districts not equipped with natural gas or grid heating facilities to use coal-fired furnaces for heating instead, it said.
"This move is likely to result in more pollution near-term and could lead to more cuts to industry that is not involved in providing public heat,'' the report said.
In a report last month providing a detailed analysis of China's pollution controls and their impact on commodities, UBS said China was converting more coal power plants to gas, increasing its nuclear power capacity, and supporting growth in wind, solar and bio power sectors.
Meanwhile, the Chinese push to increase the use of electric vehicles has ramifications for Australian miners mining commodities such as lithium, graphite, cobalt, nickel and copper.
"China has the world's most aggressive government plans to promote electric vehicles...it aims to increase New Energy Vehicles (NEVs) to two million by 2020 and to greater than seven million (or >20%) by 2025,'' it said.
"It is also imposing tough new sales targets of electric plug-ins and hybrids by 2019 under the so-called cap-and-trade policy (with NEVs to make up at least 10% of output),'' it said.
UBS global commodity analyst Lachlan Shaw said China's pollution crackdown was "certainly having an impact'' on Australian miners.
"It is driving demand for higher quality feedstocks in a number of industries in China. So the major iron ore producers tend to sell medium to good grade iron ore, they're getting better pricing.
"Australian met coal and thermal coal tends to be above average in quality. Met coal particularly is the best in the world, and the pricing for those types of products is building in more of a premium because of the pollution crackdown,'' he said.
"So in other words, pricing for low quality feedstocks in almost every industry in China is being penalised right now because of the pollution crackdown, producers don't want to be taking low grade material and polluting a lot because the government is worried about pollution,'' Mr Shaw said.
Mr Shaw said that overall, the China pollution crackdown had more of a positive impact on Australian miners than a negative one.
On commodities used in electric vehicles Mr Shaw said lithium prices "have probably lifted by three or four times in the last two years'', graphite prices had risen 30-40 per cent in recent months, and cobalt prices had lifted "by four times" in the last two years and supply/demand was tight.
