China

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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China and India find themselves in some sort of a mini-race in the crude refining business.

(As readers of our Annual Outlook know, the oil sector is one of three key macroeconomic pillars we consider in our analysis of commodities markets, in addition to the Chinese economy and the strength of the U.S. dollar).

China races ahead in crude refining

China, though, is paces ahead of its neighbor. If all goes to plan, China could soon dethrone the present No. 1 refiner, the United States.

Bloomberg quoted the International Energy Agency (IEA), which said that perhaps by next year, China would dethrone the U.S. as the top refining country in the world.

This will be no small feat.

China may become No. 1 following the closure of some refineries in the U.S.

Steve Sawyer, director of refining at energy industry consultancy Facts Global Energy, told Bloomberg in an interview that, in the coming years, China would be putting out an additional million barrels a day, helping it overtake the U.S.

India aims to build crude refining capacity

While China goes about the crude refining business, its neighbor India has also thrown its hat in the ring.

For the last couple of years, India has made no bones of building its domestic refining capacity. The country has added some well-known international petroleum companies to its client list.

India planned to double its current capacity in the next 10 years. However, Prime Minister Narendra Modi wants things done faster.

At present, India’s refining capacity stands at 250 million tons, or a little more than 5 million barrels per day, based on a conversion factor of 7.33 barrels per metric ton of oil. Under an earlier plan, India sought to hike this to 450 million to 500 million tons over the next 10 years.

Now, Modi wants to do it even faster, accomplishing it within five years.

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We wrote last month how China’s rapid recovery from the COVID-19 pandemic resulted in the country importing semi-finished products for which it previously had been self-reliant or even a net exporter for the last decade.

Some steel products and primary aluminum swung into becoming significant net inflows for the economy during the summer months.

But as we cautioned at the time, this was only expected to be a temporary phenomenon.

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China’s steel flows recalibrate

Sure enough, although volumes are still down on this time last year, exports have picked up and imports have fallen.

In a recent post, Argus Media reported China’s steel exports in October rose by 5.2% from September to 4.04 million tons. Chinese mills shifted supplies to overseas markets, enabled — or forced, depending on your point of view — by falling domestic prices.

Summertime exports rose as domestic prices fell

Falling domestic prices in the summer aided Chinese steel mills’ ability to export so aggressively.

Domestic inventory levels rose and domestic crude steel production hit record levels of 3.09 million tons a day in September, in large part to meet domestic demand. Weakness in domestic steel prices suggests overoptimism by the steel mills, inevitably resulting in excess production leaking into export markets looking for a home.

Domestic Chinese steel prices have recovered since the summer as global steel prices have risen and imports have fallen.

As the global recovery has lifted demand and prices, mills in India and elsewhere have not felt the need to distress sell metal into China. In addition, the arbitrage window has narrowed.

Imports have therefore appeared less attractive to Chinese buyers and exports more attractive to mills. That is a trend we expect to continue through Q4.

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The Department of Commerce made a preliminary determination in its anti-dumping investigation covering non-refillable steel cylinders imported from China.

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DOC rules steel cylinders dumped from China

The DOC determined China dumped the steel products into the U.S. at margins between 57.83% and 114.58%.

The domestic petitioner in the case is Worthington Industries of Columbus, Ohio.

“As a result of today’s decisions, Commerce will instruct U.S. Customs and Border Protection (CBP) to collect cash deposits from importers of non-refillable steel cylinders from China based on the preliminary rates noted above,” the DOC said in a release last week.

Imports of non-refillable steel cylinders reached a value of $21.5 million in 2019, per the DOC.

The U.S. International Trade Commission will make its final determination in the case by Feb. 22, 2021.

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According to the Financial Times, China’s President Xi Jinping surprised the global community by announcing last month a hugely ambitious plan to improve China’s environment and make the country carbon-neutral by 2060.

In addition, he said the country’s emissions would peak before 2030.

But does this really mean anything? If it does, what impact will it have on the country’s massive steel industry? The steel industry, of course, is the source of a significant proportion of the country’s carbon emissions?

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China’s environment and emissions figures

Firstly, let’s look at the scale of the proposition.

China is the world’s largest emitter of greenhouse gases (such as carbon dioxide and methane).

Last year, China’s emissions accounted for roughly 27% of the global total. The country’s total accounted for more than the U.S., Europe and Japan combined, the Financial Times reported.

Furthermore, the country consumes more coal than the rest of the world put together. In addition, China continues to commission new coal power plants.

On the one hand, China also leads the world in the deployment of solar power, wind power and electric vehicles. Its energy-efficiency policies are ambitious and successful. Significantly, there are no known climate change deniers in the Chinese leadership.

But is the pledge meaningful?

It contrasts poorly with that made by almost 70 countries and the E.U. Those countries have already pledged to make their economies “net-zero” greenhouse gas emitters by mid-century, or 10 years earlier than China’s pledge.

And the 2030 peak emissions date is a rehash of a commitment made back in 2014, suggesting peak emissions could be reached well before 2030 and the authorities are simply back-sliding.

Difficult changes

The scale of the challenge vis-a-vis China’s environment and emissions is considerable.

More than 85% of China’s primary energy last year came from coal, oil, and natural gas, all of which produce carbon dioxide. This came despite massive investment in solar and wind.

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