Caixin
Apr 02, 2021 06:18 PM
OPINION

Opinion: How Cement and Steel Could Swing China’s Carbon Peak Plan

China has a lower level of inflation than other major world economies. Nevertheless, the country’s rate of capacity utilization, inventory and other indicators make clear that its domestic supply and demand are in a tight balance. The campaign to reach peak carbon dioxide emissions is already in full swing. We can expect that industries will unveil their top-level designs for overall planning on how to achieve this goal.

China has scheduled its carbon dioxide emissions to peak by 2030. However, relevant enterprises and industries like steel and cement have recently set much more aggressive goals, aiming to realize peak emissions five to seven years earlier. To fulfill this commitment, will industries deliberately reduce output to spur an increase in price?

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Cement and steel feel the pinch

Held to the target year of 2030, industrial production will inevitably feel the constraint.

Take the steel industry for example. The Ministry of Industry and Information Technology recently required the industry to reduce output; in the northern city of Tangshan, Hebei province, where massive steel mills are the key industry, the production limit has clearly been stepped up. Hebei Iron and Steel Group and China Baowu Steel Group Corp. Ltd., based in Shanghai and Wuhan, Central China’s Hubei province, have scheduled their emissions peaks for 2022 and 2023, respectively, signs of the enormous pressure on industries to reduce output.

Actions for cutting carbon dioxide emissions have been applied in China’s steel industry for years now, and carbon emissions per unit of steel have fallen by more than 20% over the past decade. Even if the steel industry can complete its peak emissions campaign ahead of schedule in 2025, the goal will not necessarily require it to slash output dramatically this year.

Unlike the period from 2016 and 2017, when the priority was supply-side structural reform, this year has seen weak demand for real estate and infrastructure investment. According to recent reports, new housing construction even indicated negative growth (excluding base disturbances). Relatively weak demand is conducive to offsetting the shrunken supply. In this regard, the prices of industrial goods like steel may not rise significantly.

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The cement industry recently also made a commitment to peak emissions by 2023.

Unlike the steel industry, where carbon emissions can be reduced by technical upgrades, the cement industry has benefited little from its technical improvements over the decade — which, though constant, have only reduced carbon emissions per ton of cement clinker by less than 1% annually on average. In the short term, the main way to control carbon emissions in the cement industry will be to limit production.

To meet peak carbon emission requirements, cement output should slow significantly this year, though the degree of slowdown may be more moderate than it was during the supply-side structural reform from 2016 to 2017, when demand for cement was quite high. This year, there should be less and less impetus for investing in real estate and infrastructure, and production constraints may also have a limited impact on the rise of cement prices.

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What about prices over the long term?

Moving forward, imported influence factors are likely to be key to the current round of domestic inflation. The action plans formulated by industries to meet their carbon peaking goals will be made public soon. The aspiration for ending this campaign in advance is obvious in these plans, but as a whole, there is a long way to go.

China’s current carbon emission intensity (the amount of carbon dioxide emitted per unit of GDP growth) is down 18.2% from 2015. This rate of decline sounds high, but is still not enough. If we maintain this rate, China is still under pressure to realize its peak goal before 2030. Assuming that economic growth remains unchanged, in the days ahead it will be particularly important to accelerate low-carbon technology innovation and institutional reform.

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A previous version of this story incorrectly stated that Wuhan was a city of Hebei province. It is actually in Hubei province. 

Wu Ge is the chief economist of Changjiang Securities Co. Ltd.

Translated by Lan-Bridge Communications.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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