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Worried about the implications of dramatic cuts to steel production at a time when China’s post-pandemic economic recovery is slowing, the Politburo issued a short statement late on Friday which said it opposed “aggressive” measures to reduce emissions.
More specifically, it called for an end to the “campaign-style” measures to tackle the problem. That was a reference to the political campaigns that have underpinned Communist Party policy-making for decades.
“We need to make a systematic or coordinated effort,” the statement released by state news agency Xinhua said.
“This seems to indicate there is no need for China to take dramatic measures to reduce carbon emissions, including in the steel sector,” one trader said.
The implications of the statement for China’s steel production, and therefore demand for Australian iron ore, are significant. Steel futures fell when markets resumed trading on Monday on the new assumption that cuts to Chinese steel production would be lower than expected.
It is not surprising the Politburo statement did not include specific targets or elaborate further. The top Party body usually makes broad and generalised comments which form a directive that then takes weeks to travel up the chain to the relevant government ministry.
In this case, it is the Ministry of Information and Technology which is responsible for steel production.
Confusingly, Chen Kelong, a senior official from the same ministry, had given a speech on Thursday to the general assembly of the China Iron Steel Association (CISA) in Shanghai in which he talked about the challenges facing the industry. He flagged steel production cuts to meet Xi’s carbon neutrality targets. While new technology would help achieve this longer-term, the most effective short-term solution was cutting production. CISA also flagged production cuts in a statement on Sunday.
Because China’s steel production rose 12 per cent in the first half, there were expectations this would have to drop dramatically in the second half to comply with emissions-reduction plans. Steel producers like Shagang Group were already curtailing production and overseas sales.
However, the Politburo directive appears to give steel producers some leeway to avoid aggressive cuts. The market is now adjusting forecasts to factor in an increase in steel production for the full year.
“We expect steel production controls will be more gradual paced going forward,” according to Morgan Stanley analysts who are now forecasting a 4 to 5 per cent rise in full year production. Production would still fall in the second-half but nowhere near the 13 per cent the market had been factoring in.
Iron ore prices were up 1.6 per cent on Tuesday morning to $US184.4 per tonne, although they are still down more than 20 per cent on May’s high of $US237.57.
The confusion around China’s climate policies will continue for some time and are part of the wider challenge for investors as the government’s economic priorities shift from unbridled growth to managing social issues such as climate change and encouraging families to have more children.
China is the world’s biggest carbon emitter and has signalled it is taking its obligations to tackle this seriously. However, there have long been doubts about how quickly it can wean itself off coking coal, which powers the steel-making sector, and coal-fired electricity.
China missed a UN deadline last week to submit plans for cutting greenhouse gas emissions ahead of the COP26 summit in Glasgow. The United States has also been pushing China to speed up its emissions-reduction porgram.
This is challenging as there were reports of power shortages during the Chinese summer caused by a coal shortage. Reuters reported last month that power plants had been ordered to build their coal inventory to the equivalent of at least seven days of consumption due to shortages – and all this while Australian coal imports are restricted amid trade tensions between Beijing and Canberra.
There are, however, suggestions that China’s emissions trading scheme (ETS), launched last month, may in fact benefit Australian rare earths and gas exporters.
“The PRC’s current ETS allowance allocation plan exempts gas-fired units from compliance obligations, which boosts the comparative advantage of gas over coal for power generation. This will benefit Australian LNG exports,” says Xunpeng Shi, a research fellow at the Australia-China Relations Institute who has previously worked in the coal sector.
He also says increased demand for renewable energies could also increase demand for Australia’s rare earths, such as lithium. That would be an interesting development given China is seen a competitor to China in the rare earths space.
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