The country has pledged to limit its crude steel production this year to no higher than the 1.065 billion tons it did in 2020. To achieve this goal, steelmakers will have to reduce production by about 10 percent from the record first half for the remainder of 2021. Speed according to Reuters calculations based on data from the National Bureau of Statistics.
Still, with steel prices already near record highs amid an stimulus-driven construction and production boom, any forced supply disruption could trigger further raw material inflation, sending Chinese producer prices to multi-year highs and forcing a slowdown in factory activity.
Analysts say it won't be easy for China to balance its emissions targets and economic targets, but it will try to alleviate supply shortages and price increases with export tariffs and higher imports. As the world's largest polluter, contributing nearly 31 percent of global CO2 emissions, according to BP, China plays a critical role in determining whether worldwide emissions reduction targets can be met.
A landmark UN climate report released last week, which says climate change is worsening due to heavy fossil fuel use, has brought the country under further scrutiny. And the steel industry, which has a relatively greater challenge in decarbonizing due to its huge power needs, accounts for about 15% of China's total greenhouse gas emissions.
China has ambitious pollution reduction plans: to limit emissions by 2030, become carbon neutral by 2060, and shut down old chimney capacity, including steel. The world's largest steelmaker Baowu Group - also the world's largest - said the steel production cuts are now "a non-negotiable political issue".
But a rollback in manufacturing and construction, fueled by massive stimulus measures, cheap financing, and a global consumer goods boom since the COVID-19 lockdowns were lifted last year, has driven a spike in CO2 emissions.
Among China's 31 provinces and territories, the only reported decrease in production from January to June occurred in the steel hubs Hebei and Tianjin, as long-planned capacity cuts began.
The second and third largest producers, Jiangsu and Shandong provinces, increased production by 13 percent and 17 percent. Less established steelmakers further increased production in the first half of 2021. The Southern Guangxi autonomous region has increased production by 88 percent to around 20 million tons due to the new facilities – roughly the same as Vietnam produced in all of 2020.
Other provinces, including Yunnan and Guangdong, increased production by double digits in the first six months, allowing Southern China alone to offset the decline in the country's main steel centers. Much of the relocation of steel production away from northern China was planned as part of Beijing's air purification work.
However, the more dispersed nature of steel production makes it difficult for authorities to monitor and influence long-distance operations, especially in regions where local governments are keen to pursue economic expansion and where metal demand is strong.
Concerned about the rise in emissions, Beijing has pledged to strengthen its oversight of compliance with production cuts and said it will correct any "campaign-style" carbon reduction efforts. Major steel producing regions, including Hebei, Jiangsu, Shandong and Fujian, received orders to cut production for the remainder of the year.
However, falling production, along with the general consumer firm, raises concerns about a potential supply squeeze in 2021. "If the production cuts are strictly enforced, there will be a shortage of supply in the market," said Steve Xi, Wood Mackenzie's senior adviser. export volumes will likely fall in the second half.
To ensure adequate supply, China raised its steel export tariffs twice in three months and removed export tax breaks on about 170 steel products. Despite this, analysts still expect a tight market.
According to CITIC Securities analyst Tang Chuanlin, "There is still a gap of over 5 percent in steel supply (versus demand) in the second half." With the profitability of industrial firms squeezed by higher prices, Beijing unexpectedly lowered its bank reserve requirements last month to encourage lending to producers.
However, with global demand remaining strong due to the easing of pandemic restrictions, strict output controls may suggest continued margin pressure on downstream users. "The falling steel supply in H2 is very likely to happen," said Jinrui Capital analyst Zhuo Guiqiu. "So, we expect the conflict between falling supply and recovery demand to keep steel prices high."
Richard Lu, senior analyst at commodity consulting firm CRU, was less pessimistic about the impact of the steel production cuts. "We don't see a conflict between policy and government intention," said Lu, adding that a shortage would not be widespread and the industry could see higher steel margins and a decline in inventories.
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