China’s Caught Between Rising GDP Growth and Rising Air Pollution

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Beijing is caught in something of a quandary.

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On the one hand, an admirable, and increasingly important social imperative, the Chinese government’s focus on air pollution, has resulted in a crackdown on a range of polluting industries. Coal-fired power stations around Beijing and other major cities have been closed. Steel capacity has been targeted for cutbacks, although not universally.

Reports suggest rebar production used in construction has been prioritized over other product areas and that’s just one example of selective enforcement. A recent report by Reuters states new aluminum production capacity has been halted. What China fails to meet capacity cutback targets — an issue one suspects would have been “worked around” a year or two back when environmental considerations where less of an imperative?

This crackdown on output comes at the same time as the economy is performing quite well. Official data released last week showed China’s economy grew by a better-than-expected 6.9% comparing the March quarter to the same period in the previous year, Australian Financial Review reports. That is up from 6.8% in the final quarter of 2016. Industrial production was also far better than forecast, growing at 7.6% in March compared to 6.3% in first two months of the year.

So, broadly solid growth meets government-enforced closures results in what? A perception of potentially constrained supply and the resulting attention of speculators? Bingo. Prices increases and mills responding by ramping up output. China is not short of aluminum, for example. It doesn’t have huge surpluses but the Shanghai Futures Exchange price was available at a relative discount to the London Metal Exchange‘s last year and early in this one, but it’s recently been rising strongly to a nearly a four-year high. The halting of three new aluminum projects with a capacity of 2 million metric tons in Xinjiang in western China for violating rules aimed at curbing capacity only adds fuel to the flames.

Yet, rising smog levels around Beijing, Guangzhou and elsewhere adds pressure on the government to speed up efforts to curb the output of more polluting sources — whether they are coal-fired power stations or steel and aluminum plants. China’s Ministry of Environmental Protection released data this month that reported for Beijing the concentration of small particulates in the atmosphere, known as PM2.5, rose by nearly 27% between January and March, compared to the same period in 2016. Levels in Guangzhou also rose and the results have been supported by independent data collected in the US Embassy in Beijing.

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Some had hoped the fall in the Iron ore market and a softening of steel prices in Q1 showed demand was dropping in China but the reality is the iron ore price is probably more a result of the exit of speculators taking profits than a collapse of demand. As raw material costs have fallen steel mills have continued to maintain full output and fought for sales by dropping finished steel prices.

Speculators meanwhile have caught on to government proposals to cut aluminum output later this year and plowed into the SHFE aluminum market driving up prices. The LME has fallen back in recent days, probably on profit taking, but is still around the year’s highs having seen a steady upward trend during 2016.

It would be normal to expect some consolidation after such a rise and we may well see a period of flat prices off recent highs for some months but later this year prices both on the LME and SHFE are likely to resume their upward trend. Chinese smelters know this, and are producing for all they are worth now before output cuts bite. Not surprisingly, with such a backdrop smog levels have been on the rise around Beijing and as afr.com points out, while government figures for GDP growth and air pollution have been challenged in the past the fact they are aligned suggests both a broadly right, the one follows the other only making the government’s job harder.

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