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Confused by China’s mixed messages on steel? This will help

The Chinese government’s mixed messages on carbon emissions have sent markets into a spin.

Like many of Beijing’s policies, the government’s latest statement about how it will meet Xi Jinping’s ambitious target of peak emissions by 2030 and how this will affect steel production is open to interpretation.

After earlier signalling an aggressive approach to climate change, Xi’s top decision-makers are now suggesting the opposite should happen.

A meeting late last week of the Politburo, which is effectively Xi’s cabinet, concluded that local governments were moving too aggressively to meet perceived political targets to slash steel production to meet the climate targets.

This is a common problem in China, where local officials sometimes blindly follow or over-interpret directives from Beijing regardless of the social or economic costs. This happened in 2017 when children were left freezing in classrooms in the country’s north because local officials took too literally a directive to stop using coal.

Worried about the implications of dramatic cuts to steel production at a time when China’s post-pandemic economic recovery is slowing, the Politburo issued a short statement late on Friday which said it opposed “aggressive” measures to reduce emissions.

More specifically, it called for an end to the “campaign-style” measures to tackle the problem. That was a reference to the political campaigns that have underpinned Communist Party policy-making for decades.

“We need to make a systematic or co-ordinated effort,” the statement released by state news agency Xinhua said.

“This seems to indicate there is no need for China to take dramatic measures to reduce carbon emissions, including in the steel sector,” one trader said.

The implications of the statement for China’s steel production, and therefore demand for Australian iron ore, are significant. Steel futures fell when markets resumed trading on Monday on the new assumption that cuts to Chinese steel production would be lower than expected.

It is not surprising the Politburo statement did not include specific targets or elaborate further. The top Party body usually makes broad and generalised comments which form a directive that then takes weeks to travel up the chain to the relevant government ministry.

In this case, it is the Ministry of Information and Technology which is responsible for steel production.

Confusingly, Chen Kelong, a senior official from the same ministry, had given a speech on Thursday to the general assembly of the China Iron Steel Association (CISA) in Shanghai in which he talked about the challenges facing the industry. He flagged steel production cuts to meet Xi’s carbon neutrality targets. While new technology would help achieve this longer-term, the most effective short-term solution was cutting production. CISA also flagged production cuts in a statement on Sunday.

Because China’s steel production rose 12 per cent in the first half, there were expectations this would have to drop dramatically in the second half to comply with emissions-reduction plans. Steel producers like Shagang Group were already curtailing production and overseas sales.

However, the Politburo directive appears to give steel producers some leeway to avoid aggressive cuts. The market is now adjusting forecasts to factor in an increase in steel production for the full year.

“We expect steel production controls will be more gradual paced going forward,” according to Morgan Stanley analysts who are now forecasting a 4 to 5 per cent rise in full year production. Production would still fall in the second half but nowhere near the 13 per cent the market had been factoring in.

Iron ore prices were up 1.6 per cent on Tuesday morning to $US184.4 per tonne, although they are still down more than 20 per cent on May’s high of $US237.57.

The confusion around China’s climate policies will continue for some time and are part of the wider challenge for investors as the government’s economic priorities shift from unbridled growth to managing social issues such as climate change and encouraging families to have more children.

China is the world’s biggest carbon emitter and has signalled it is taking its obligations to tackle this seriously. However, there have long been doubts about how quickly it can wean itself off coking coal, which powers the steel-making sector, and coal-fired electricity.
Source: Australian Financial Review

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