China

China has previously been cast in a sinister role with respect to restricting the production and export of critical rare earth metals, usually salts, used to produce a host of products. Those products include magnets for consumers electronics and electric cars, defense equipment and advanced ceramics.

But while the country deliberately created a near monopoly position in the global rare earths refining market, it created a horrendous environmental problem in the process.

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Rare earths consolidation and rising prices

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In an effort to clean up its environmental act and to gain better control over what had become a wild west mining and refining landscape, Beijing engineered consolidation in the industry to fewer but larger entities.

However, that’s when the criticism started, as China capped exports, causing a spike in prices.

That was largely short-lived. Prices returned to earth after a spike in 2017. However, prices have been rising strongly again this year due to surging demand, both within China and without.

Prices are up between 20-50% this year alone. Surging demand has fueled a bidding war for supplies in a constrained market. With China holding some 85% of global refining capacity and the only mine to refined products supply chain, it not only has a unique position but a unique responsibility in the market.

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Much is being made of Beijing’s efforts to meet its environmental emissions targets — the country states it will hit peak emissions before 2030 and carbon neutrality by 2060 — and its restricted steel and aluminium production.

But a recent Reuters post by John Kemp suggests output is being impacted more by a widening electricity crisis than by enforced shutdowns to meet environmental goals.

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China’s energy crisis

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Kemp explains that China is in the grip of a severe shortage of both coal and electricity. Coal output has not kept up with rising electricity demands from a rapidly recovering economy.

China’s electricity generation increased by 616 Terawatt-hours (13%) in the first eight months of 2021 compared with the same period last year. The largest rises came from the service sector and primary industries.

However, most of the increase has been supplied by thermal generators, principally coal-fired power stations, Kemp explains. Those generators increased output by 465 TWh (14%) in the first eight months.

Other power sources, such as hydro-electric output, have actually fallen slightly this year due to water shortages. Unfortunately, nuclear in China is a tiny fraction of power generation, dwarfed even by renewables like wind and solar.

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While the rest of the world is trying to com to grips with the European Union’s proposed carbon border adjustment mechanism (CBAM) – which calls for the levying of charges on non-E.U. products in relation to their embedded carbon footprint — China, on the other hand, is currently grappling with a slightly different energy-related issue.

A massive heat wave in some parts of the country coupled with a shortage of coal because of China’s spat with chief supplier Australia has sent coal prices soaring.

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China to ramp up coal production

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Now, China, the world’s biggest consumer of coal, plans to add almost 110 million tons (MT) per year of advanced production capacity in the second half of this year to meet the rising demand of coal.

This Economic Times reported China’s National Development and Reform Commission (NDRC) said that around 400 MT of coal mining capacity is under review for the government’s approval. Another 70 MT capacity is also under construction, and would be launched in a phased manner.

What’s more, China’s state planner has asked power plants to build their coal inventory to the equivalent of at least seven days of consumption by July 21. News agency Reuters said the Chinese government was trying its best to ensure electric supply to the coal-fired plants amid surging power consumption from industrial and residential users.

In the first half of 2021, China has already added over 140 MT of coal mining capacity.

Eleven provinces registered record-breaking power load a few days ago, the Economic Times reported, as the heat wave led to higher use of electricity. In the first six months of 2021, power consumption rose by 16% from a year earlier, the report added.

Old coal

While simultaneously augmenting coal capacity, the NDRC has come down on outdated coal capacity. Where once there were 10,000 coal mines in China in 2015, now there are about 5,000. The NDRC has been urging coal miners to set up advanced mining capacity and ramp up output.

China’s average daily coal consumption has gone up to over 2.2 MT at key power plants in at least eight provinces in China as of July 15, Reuters reported.

Meanwhile, the South China Morning Post quoted the NDRC, which said China will release over 10 MT of coal from its state reserves.

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China’s efforts to curb carbon emissions from the steel manufacturing process have slowed down its steel production.

But only to a degree.

However, a new report now shows that almost all the major steel mills in its steelmaking hub, Tangshan in Hebei province are back online.

A report by industry portal mysteel.com, citing its field survey, said the furnaces were firing again — albeit at 70% — according to this news report.

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Tangshan steel mills come back online

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In fact, Tangshan’s mills contribute about 14% of China’s raw steel output. Furnaces are running at a lower rate because of China’s stringent new emission standards. Only those mills meeting these conditions are going full blast, according to the news report.

China remains the world’s No. 1 steel producer with over 1 billion tons of crude steel production. However, Beijing has been trying to cut greenhouse gas emissions to meet the country’s pledge to bring its emissions to a peak before 2030.

In the first five months of this year, the country’s crude steel output reached 473.1 million tons, the World Steel Association reported. The five-month output total marked an increase of 13.9% year over year.

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China’s steel and aluminum market is undergoing a quiet revolution.

It’s not a revolution of investment or innovation.

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Peak aluminum, steel in China?

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According to Reuters, Beijing’s target of peak coal use by 2030 is asserting a dampening effect on new steel mill and aluminum smelter investment.

As such, the country could be at or near peak production. As Reuters’ Andy Home notes, the country’s rising output over the years as had a dampening effect on prices. That trend has led some Western producers to cease operations.

But a combination of harsher environmental legislation resulting in Beijing dissuading investment in new coal fired power projects, combined with Western markets’ meaningful action — after years of simply complaining — to block out Chinese exports of aluminum and steel products suggests the Chinese impetus to build capacity and the rest of the world’s willingness to buy product are both going through a transformational change.

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When the largest aluminum producer on earth keeps reporting high import figures, the world sits up and takes note.

According to figures released by the Chinese General Administration of Customs a few days ago, China recorded a new high for aluminum imports in March 2021.

Stop obsessing about the actual forecasted aluminum price. It’s more important to spot the trend. 

China aluminum imports surge in March

Imports went up 40.8% from February 2021, taking first quarter imports to a total of 661,517 tons. The quarterly total marked an increase of 118.8% from the same period in 2020.

China has been on this aluminum importing spree since July 2020. China’s aluminum imports last year, including primary aluminum and unwrought alloy, surpassed the previous annual record set in 2009.

What’s more, Shanghai aluminum prices last week were at their highest since 2010. China had bought in record volumes of the metal in 2020, riding on an uptick in domestic demand. Strong demand pushed the Shanghai prices higher than London prices, opening an arbitrage window for cheaper overseas metal.

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China — and, indeed, Asia as a whole — has a serious issue evolving that few would have seen coming five years ago.

Back then, the carbon content of aluminium was a well-known fact. However, its light weight and high recyclability seemed to outweigh the CO2 emissions inherent in its production.

Not so now.

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China aluminum sector and emissions

Government’s ambitions to reduce atmospheric pollution and consumers’ increasing desire for low or net-zero emission products is driving a rapid transformation in issues around aluminum smelter power supply.

Nowhere is this likely manifesting itself as dramatically as in China. Environmental pollution is one of few issues Beijing actually feels vulnerable about as a source of public unrest. The government’s latest five-year plan calls for dramatic reductions in emissions. The news has already hastened a move to hydro-rich Yunnan province, Reuters reported. The government effort against pollution could herald the closure of capacity elsewhere.

Coal problem

The challenge for China is that so much of its aluminum smelting uses coal-fired power production.

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Stainless steel prices in Asia have plateaued for now.

But most suggest this is a temporary slowdown in advance of the Chinese New Year holidays.

Thereafter, the market is likely to continue its relentless rise of the last two years.

China stainless steel market ramps up output

According to ArgusMedia, China’s production, imports and consumption of stainless steel all rose in 2020. China produced 30.14 million tons of crude stainless steel in 2020, up by 2.51% from 2019.

Despite significantly higher nickel prices, output increases favored nickel bearing 300 & 400 series and even duplex stainless steel with only non-nickel-containing 200 series declining.

Meanwhile, imports surged to 1.81 million tons, up 61.33%. Much of those imports came from Indonesia, where Chinese firm Tsingshan Holding Group has a new mill. As such, imports from Indonesia rose 24.3% year over year to 1.1 million tonnes in the first nine months of 2020.

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Declining exports

Exports, on the other hand, declined. Trade disputes between China and the United States, the European Union, Japan and South Korea led to the imposition of duties on shipments.

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China has had a fraction of the deaths and hospitalizations from the COVID-19 pandemic that Western societies have had. Furthermore, China had an economic bounceback that saw its GDP rise 2.3% last year.

China’s bounceback

The rebound has been impressive.

Construction of new high-speed train lines to smaller provincial cities and new motorways connecting remote cities left behind in previous plans in part drove the recovery.

The housing sector has also boomed. Overseas demand has boosted manufacturing, particularly PPE and electronic goods, even as other exporters have suffered by lockdowns in those markets.

In the longer term, further debt and a swing back to manufacturing from the earlier pivot to consumption will not do the economy or China any good.

For now, however, the economy is humming. Tailwinds from both stimulus and pent-up savings should keep the economy growing strongly in the first half of 2021.

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If we were worried about China’s dominance of global steel output over the last decade, the next decade is looking like it may be even worse.

Having bounced back robustly this year from severe coronavirus lockdowns in Q1, China is on track to top 1 billion tons of steel production by the end of 2020, beating 2019’s 996.3 million tons despite steel-consuming industries suffering a lockdown.

Indeed China is the only major producing country to have increased output this year, up 5.6% at the end of October. Europe, North America, Japan, South Korea, and India are all down over the year cumulatively, leading to a global 1.9% reduction.

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Despite a small decrease from record levels in August and September, China’s October output was still up on last year.

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