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19/10/2018 17:43

China's environmental policy negative for commodity sectors

[ET Net News Agency, 19 October 2018] Moody's Investors Service said that China's
increased focus on environmental protection is credit negative for companies in the coal,
steel, petrochemical and nonferrous metal sectors.
"The higher capital spending required for facility upgrades and the increase in
operating costs to comply with stricter regulations will particularly pressure small and
financially weak companies, given their limited financial flexibility," said Jessie Tung,
a Moody's Vice President and Senior Credit Officer.
"At the same time, these rising environmental costs will accelerate industry
consolidation, benefitting large and financially strong companies -- especially the SOEs
-- that are better positioned to absorb the extra spending," added Nino Siu, a Moody's
Vice President and Senior Analyst.
Moody's conclusions are included in its just-released report "Non-financial corporates
-- China: Tighter environmental policy is credit negative for four commodity sectors".
China has been stepping up its efforts over the past five years to improve air quality
and address other environmental concerns, with regulations introduced since 2017
containing more stringent, multifaceted and more detailed rules than in the past.
Some regulations have been focused on specific regions -- such as measures specific to
Beijing, Tianjin and 26 other cities across four provinces to improve air quality -- and
have thus affected smaller companies in those regions in particular.
Conversely, industry leaders tend to be more geographically diversified than the smaller
companies, and hence less affected by the more stringent rules that can be applicable to
specific regions.
Their greater capacity for spending is also evidenced by their investments in
environmental protection, which amounted to over RMB8 billion in 2017 in some cases -- an
amount that cannot easily be matched by smaller counterparts.
The bigger players will also benefit from less competition and more resilient pricing as
the industries consolidate, and given lower supply under production restrictions and
suspensions implemented because of environmental standards.
The number of smaller sized companies in the four sectors of coal, steel, petrochemical
and nonferrous metal sectors has already declined over the past few years.
Finally, Moody's pointed out that environmental, social and governance (ESG) criteria
are becoming increasingly important considerations for investors in Asia and globally,
thus potentially enhancing funding access for companies that improve their environmental
standards.
This is already seen in the rapid growth of China's green bond market, with China
accounting for 13% of global green bond issuance sine the first global transition in 2007.
(KL)

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