China’s Green Campaign Leaves Metals Braced for More Ructions

(Bloomberg) -- China’s heavy-industry heartlands are steeling for tougher measures to tackle smog and slash carbon emissions after high-profile crackdowns and a ramp-up in President Xi Jinping’s green rhetoric.

Metals have rocketed higher -- with some markets now at the highest in a decade -- on signs that a more centralized push to rein in pollution and target profligate energy use will curb production. Recent crackdowns in major hubs for aluminum and steel point to a stiffer approach to those flouting rules, even after the government unveiled more moderate environmental goals than expected in its latest Five-Year Plan.

“It’s the start of a battle between competing interests,” Lauri Myllyvirta, lead analyst for the Centre for Research on Energy and Clean Air, said by phone. “The Five-Year Plan outlined a very business-as-usual model, but there is clearly a push from many other important actors for more meaningful progress on emissions.”

China’s construction-heavy comeback from the pandemic drove up emissions in 2020. Now, policy makers have to thread between the need to meet a growth target of more than 6%, while paying heed to leadership calls for cleaner development. For metals, that puts decades of supply growth at risk.

Concerns are already feeding through to markets. Steel coil, used in everything from fridges to cars, is at the highest since 2008. Aluminum futures in Shanghai are near the highest in a decade, while zinc’s at an almost two-year high. At the same time, iron ore has slumped on concerns production curbs at steel plants will hurt demand for the raw material.

Energy Hungry

Metals production is an energy-intensive process. Steel accounts for 15% of China’s carbon emissions, the biggest chunk among manufacturers, with the bulk of pollution generated in high-temperature furnaces where iron ore is melted with coal. Aluminum accounts for 3.6%, largely because of its heavy reliance on coal stations to power its refineries.

China’s environment minister personally led a swoop on the steel city of Tangshan, responsible for 14% of national production, this month. His team’s discovery that multiple plants were flouting curbs and faking records was swiftly followed by the extension of restrictions through the rest of this year.

In Inner Mongolia, authorities have set their sights on a series of targets affecting multiple industries including aluminum and zinc after the autonomous region was upbraided by President Xi for using too much energy. U.S. aluminum supplier Alcoa Corp. sees curbs as a “game-changer” for the industry that’s struggled with years of supply gluts.

Read more: Xi’s green drive heralds speedy end to aluminum’s era of plenty

The more bullish next step would be a widening of the campaign against dirty industries that caps supply more broadly across the country. There’s already signs that no target will be too big. Aluminum Corp. of China, the world’s top producer, was specifically called out by authorities for insufficient controls.

“China’s green push is adding fuel to the commodity rally amid the global recovery from the pandemic,” Zhu Yi, analyst at Bloomberg Intelligence said by phone. “It is going to slow down output growth of its giant metals market, and shift into high-value added products. Both of which will lead to increases in prices.”

Restriction Risks

Still, there’s a risk of less bullish outcomes if the current wave of restrictions prove localized or ineffective. And plants elsewhere in the country could simply ramp up output to offset the targeted areas, potentially handing more clout to larger, state-owned producers.

China’s steel production has surged to a record despite a multiyear push to rein in excess capacity. Australia & New Zealand Banking Group Ltd. expects output to rise this year in part due to expectations that the global economic recovery will boost demand.

“We remain skeptical as to the level of adherence and expect steelmakers outside of Tangshan to make up for any supply shortfalls,” Malan Wu, research director at consultancy Wood Mackenzie Ltd. said.

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