Pollution’s Role in Metals Production Under the Microscope

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One of the biggest drivers of metal production, and by extension price, in the year ahead could be pollution.

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Sounds a little far-fetched, doesn’t it? Yet, two of the biggest players in the metals markets, China and India, are the two most polluting major economies in the world. For now, Prime Minister Narendra Modi’s India is putting on a brave face, in spite of a recent World Health Organization study of 1,600 urban areas around the world that found India has 13 of the world’s 20 most-polluted cities.

Modi’s Dilemma

The study measured by average ambient PM2.5 levels — a measure of small particulate carbon particles in the air with critical links to lung disease. Modi claims India should not be subject to the same rules as everyone else, because it has so much catching up to do in terms of industrialization and raising large parts of its population out of poverty.

At the COP21 conference western world leaders disagreed that India should be exempt, but accepted there would be a cost, possibly an unsustainably high cost for an emerging economy like India’s and there will likely, therefor,e be financial help made available.

The Bigger Problem: Chinese Production

But China, as the world’s largest producer and consumer of industrial metals, will play an even bigger role. China consumes and produces roughly half of the world’s production in many leading metals and — if the tentative initial steps that have been taken to close older steel plants, coal-fired power stations and other metal refining plants on China’s eastern seaboard gather pace — Beijing may actually impact metals production.

It will almost certainly reduce the number of coal-fired power stations to be built in Beijing’s new five-year plan and possibly offer financial support to steel mills and aluminum smelters to permanently close older capacity.

Steps have been taken this year, but so great is the excess capacity that production has been barely impacted. Next year more meaningful steps may be taken as the groundswell of popular support for reducing pollution overwhelms the vested interests lobbying government hard to keep the plants open.

Much has already been achieved in the automotive market according to an ICCT white paper and roll out of China 6/VI across the country later this decade will see carbon emissions rapidly decrease at least from the greater than 100 million cars and light trucks on China’s roads. That is helping drive PGM demand in China principally in catalytic converters but also in the refining industry to produce fuels with lower sulfur content.

The Oft-Debated Peak Steel Moment

There are some suggestions China has already reached peak steel but Fitch Ratings, quoted in the China Daily, estimates it will be next year before the net additions to capacity start to fall. With capacity utilization at low levels though even substantial plant closures would not necessarily raise prices significantly.

China produced 608.94 million metric tons (down 2.1%) in the first three quarters of this year, annualized some 812 mt, but has capacity of at least 1.15 billion mt with more to come next year. So far, most plant closures have been more of a response to market forces than government action, but the latter will pick up the pace as pollution in China’s major cities becomes an increasingly sensitive subject for the population.

Recent demands by the aluminum industry that the state, in the form of the State Reserve Board, should buy up to 1 million mt of excess aluminum production to help stabilize prices should be viewed counter to the interests of the wider economy.

Whether the SRB will or not remains to be seen. Lobbying by China’s major corporations can be very effective even in situations like this where encouraging the production of more aluminum with the attendant electricity production only to depress prices in an already oversupplied market should be seen for the folly that it is. No firm decision has yet been taken on the SRB’s intervention in the metals markets, but it is said to be under active review.

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Enforced closure of plants and capacity is the way centralized economies like China’s prefer to act, rather than say a carbon tax and allowing the market to decide how that pans out in terms of investment and capacity. Arguably, if Beijing acts with vigor, the results could be seen in months rather than played out in years. Certainly 2016 will see pollution, particularly atmospheric pollution, in play and it will have a much greater role in determining decisions around metals in the world’s largest metal producer and consumer than has been the case in the past.

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