China’s Conflicting Climate and Economic Goals Roil Commodities
(Bloomberg) -- China’s efforts to thread the needle between an often conflicting array of environmental, economic, social and geopolitical objectives are playing out in increasingly unpredictable global commodity markets.
The world’s biggest consumer of raw materials, and a major producer of some of them, is attempting to curb carbon emissions and conserve electricity, while at the same time preserving economic growth. It’s also trying to clean up its oil refining sector, improve mine safety and isn’t averse to using trade policy for geopolitical ends, as evidenced by its ban on Australian coal imports.
The problem is that many of these policies are cutting the supply of commodities and pushing up prices, making Beijing’s goal to rein in inflation a lot more difficult. The trade-offs are having differing impacts on markets: iron ore prices have plunged as steel production is curbed, coal has surged due to the mine safety push and the row with Australia, while energy-intensive aluminum has jumped to a 10-year high amid the power saving drive.
How Beijing juggles the various objectives and to what extent it chooses to sacrifice its climate or social goals for the economy will have a major influence on many commodities. These charts show how the policy contradictions are playing out in key markets.
At The Coalface
The commodity that best embodies the environmental and economic balancing act is coal, which provides more than half of China’s energy and most of its electricity. It’s also the dirtiest fossil fuel and the biggest contributor to the country’s emissions. Curbing coal use is the best way to meet commitments needed to limit the rise in global temperatures.
But Beijing isn’t doing that, or at least not fast enough. President Xi Jinping said he expects consumption to grow until 2026, and state-owned companies and provincial governments are still approving new coal-fired power plants. At the same time, China’s leaders have been clear that the fuel needs to be all but eradicated by 2060, and there are signs -- including the halting of a $19 billion coal-to-chemicals plant in July - that they are serious.
A surge in domestic coal prices to a record high this year isn’t exactly incentivizing miners to produce less, however. The economic recovery from the pandemic, the ban on Australian imports and a domestic mine safety push have all contributed to the rally. Coal power plants in the Beijing area are losing money and have asked the municipal government to tear up supply contracts and pay more for electricity this winter to ensure stable supply.
China seems more determined, at least in the short term, to cut emissions from its highly pollutive steel industry. Beijing wants to cap this year’s output below that in 2020, but production actually surged to an all-time high in the first half. That portends an 11% year-on-year drop in the final six months. And in a sign the government is serious about this, key steelmaking provinces such as Guangxi and Sichuan are stepping up efforts to curb activity.
The pressure on the steel industry has flowed through to the market for its key ingredient. The fact that iron ore has plunged around 50% since mid-July shows that investors expect the government to follow through on its target. Although they could be in for a rude shock if economic growth is prioritized instead. Given that steel prices have largely held up, Beijing’s policies have provided an unexpected boon to global producers such as Nippon Steel Corp.
China’s aluminum conundrum was on clear display in the past week, as output curbs in a key hub sent China’s futures prices spiking to their highest since before the global financial crisis. Producing aluminum uses huge quantities of mostly coal-fired electricity, so the industry is a key target in campaigns to cut emissions and boost energy efficiency.
Guangxi province ordered a range of sectors including aluminum to reduce output for the rest of this year in a bid to save power and reduce emissions. But the subsequent price spike triggered a warning from the nation’s top metals association that prices were untethered from fundamentals. That pits the industry group against analysts from Goldman Sachs Group Inc. and trading giant Trafigura Group, who expect China’s decarbonization efforts to limit China’s aluminum output and push the metal to fresh highs.
For years, China’s key metric when it comes to climate change hasn’t been the amount of coal it burns, renewable energy it generates or even carbon it emits. Instead, the country has focused on efficiency, or how much energy it needs to consume to create a unit of GDP. The reasoning was that China’s industrial revolution had gotten a late start, with a big jump in emissions only beginning in the 2000s. Beijing didn’t want to limit the amount of fossil fuels it could burn, but it was intent on making sure it was becoming more efficient, cutting the amount of energy it takes for each unit of GDP by 72% from 1990.
Now that Xi has targeted peak emissions before 2030 and net-zero by 2060, efficiency is still a priority. The government’s top-line environmental goals for its current five-year plan are to reduce energy consumption per unit of GDP by 13.5% by 2025, and carbon intensity by 18% over the same period. Vice Premier Han Zheng last week ordered a curb on new projects that fail to meet standards on total energy consumption and energy intensity.
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