China’s four-decade long boom has restored the country to its traditional position as the centre of the East Asian economy. We are optimistic that it will continue to be an opportunity-rich region for BHP. Its influence on the development path of other regions is increasing. Two initiatives in particular are highly relevant to our business: the Belt and Road Initiative and supply-side reform.

The Belt and Road Initiative and commodity demand

China’s Belt and Road Initiative (BRI) is the core element in China’s Eurasian foreign policy. BRI is a development strategy that focuses on enhancing regional connectivity and infrastructure depth across Eurasia. Projects captured under BRI include ports, rail, roads, bridges, power stations, oil and gas pipelines and water management. The initiative is expected to connect the country’s underdeveloped hinterland to Europe via Central Asia, and to various points on the Indo-Pacific seaboard via land corridors through South and South East Asia.

Understanding the risks and opportunities posed by China’s future path is critical to the performance of BHP’s portfolio. Based on the results of the study we have carried out, we estimate that BRI will involve expenditure of around US$1.3 trillion and potentially generate up to 150 million tonnes of incremental steel demand, doubling the growth rate of local steel demand from 2011 numbers.

BHP is already preparing to meet this projected long-term demand.

Supply-side reforms and the immediate future

More immediately, BHP is responding to changes in the dynamics of the China market driven by the country’s supply-side reform of its steel industry. Since the end of the stimulus era that followed the global financial crisis, China’s steel mills have struggled with severe over-capacity and persistent financial difficulties. In an attempt to end this state of affairs, beginning in late 2015 China began removing 150 million tonnes per annum of capacity. The plan was to complete this by 2020, with obsolete and inefficient plants the first to be closed.

The policy has been successful. Industry-wide profitability has now improved materially. Steel industry utilisation rates and mill margins have increased sharply.

This shift has implications for iron and metallurgical coal demand. As steel mills and copper smelters transition to more energy efficient and less carbon intensive technology, structural premiums will emerge for higher-quality products, such as the Premium Low Volatile coking coal produced by BHP’s Coal assets.

China’s increasing focus on environmental protection and ‘ecological civilisation’ has prompted increasingly strict emission standards. This will also support the demand for high-quality products that produce fewer emissions.

Collaborating to build a sustainable industry

As a major metallurgical coal and iron ore supplier, BHP works with our customers, industry and research institutions in China to develop sustainable technologies. China’s contribution to the reduction of worldwide greenhouse gas emissions will be critical for the world to limit the increase in global temperatures to two degrees Celsius.

We are collaborating with Peking University on research into carbon capture and storage. China leads the way in planning and developing large-scale carbon capture and storage projects: if commercially proven, these could be a significant industry for China.

China is also on track to become the global leader in clean energy technology. Renewable energy infrastructure will generate greater demand for commodities. Electric cars and decarbonisation will drive demand for quality as well as quantity. Our industry has a responsibility to be at the forefront of innovation so that we safely, efficiently and sustainably deliver our commodities to the world, throughout any cycle.