China’s environmental goals push up metal prices

China’s Guarantee Reducing carbon emissions by the middle of this century will require significant reductions in metal production, which may further exacerbate the commodity prices that have risen rapidly as the world emerges from the coronavirus pandemic.

Over the past ten years, China’s massive and cheap coal-fired power generation has allowed it to dominate the production and export of metals from copper to steel, thereby helping to keep global prices low.

However, the implementation of stricter environmental protection regulations for smelters, steel plants and mines will restrict the supply of a range of metals and increase global inflationary pressures.

BMO analyst Colin Hamilton (Colin Hamilton) said: “You will definitely see a much slower export.” “The world has become very accustomed to China’s deflationary exports in the form of steel.”

President Xi Jinping promised that China will be carbon neutral by 2060, an effort that requires stricter regulations on the metal industry.Last month, the Ministry of Ecology and Environment of China release A draft regulation will require new energy-intensive projects to include an assessment of their carbon emissions for the first time. The regulations will cover the six major industries of thermal power, petrochemical, coal chemical, iron and steel, non-ferrous metal smelting and cement.

China is the world’s largest consumer of commodities, ranging from oil to metals, so any price increase resulting from a reduction in supply will have a significant impact on domestic inflation. It is also a major exporter of processed metals and refined oil, which may also increase global prices.

Due to increased demand for housing during the economic recovery, US steel prices rose to record highs this month. Hamilton said that, under normal circumstances, such price increases will be suppressed by exports.

According to data from S&P Platts, since August 2020, the price of hot rolled coil in the United States has risen by more than 200% to US$1,644 per short ton.

China produces 56% of the world’s steel and 57% of aluminum. The production of these two metals requires a lot of energy. According to Macquarie analysts, steel production outside of China has been sluggish, having only increased by more than 1% in the past decade, and peaked in 2018.

As part of the industrial boom, China produced a record 1.1 billion tons of steel in 2020 in response to the economic blow of the pandemic. In April of this year, despite efforts to reduce steel mill activities, production still hit a record high.

However, since steel accounts for 18% of China’s emissions, Beijing will have to curb the industry’s growth.

According to data from the China Iron and Steel Association, China has pledged to phase out 236 million tons of steel production capacity in the 14th Five-Year Plan from 2021 to 2025. Another 221 million tons will be upgraded to a more environmentally friendly process.

Macquarie analyst Serafino Capoferri said that if these cuts are made, there is almost no excess steel capacity outside of China that can help meet demand.

“In advanced economies, the focus is on decarbonized steel production. Given the imminent expenditure required to transform steel production into more sustainable technologies, many companies are reluctant to use capital for expansion,” he said.

Hamilton said that Chinese steel companies may reduce some of their carbon emissions by building plants in other countries, just like the stainless steel plants that have already happened in Indonesia. Qingshan is a Chinese private company that has become the world’s largest stainless steel producer by investing in a plant in Indonesia that relies on coal-fired power generation.

However, if Beijing cuts its domestic production capacity too quickly before establishing supply abroad, it may trigger inflation through rising commodity prices.

Price pressure is already forming.Cost of goods leaving the Chinese factory rose Data released by the National Bureau of Statistics on Wednesday showed that this was the fastest growth rate since the financial crisis last month. China’s producer price index rose 9% in May, the largest year-on-year increase since September 2008.

Morgan Stanley analysts said that China needs to achieve three things at the same time: stable economic growth, carbon neutrality and control inflation.

“It is very difficult to achieve these three goals at the same time, because the first two will lead to high raw material costs and higher inflation,” analyst Rachel Zhang said in a recent report.

These difficulties are already obvious. In March, the Minister of China’s Ministry of Environment visited Tangshan, China’s major steel-producing city, and put forward a simple request: Reduce production.

But in Tangshan earlier last week, local officials delivered a very different message.According to reports Chinese media Caixin, They met with steel producers to discuss possible relaxation of these restrictions due to the recent surge in steel prices.

Michelle Lam, an economist at Societe Generale Greater China, said: “When you focus on environmental control and want to reduce some steel production emissions, there will inevitably be a supply shock.” “The government needs to manage this shift very carefully. To prevent it from causing inflationary pressure on the upstream sector.”

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