China puts growth ahead of climate with surge in coal-powered steel mills
Study finds Beijing could struggle to honour pledge to reach peak CO2 emissions by 2030
China’s expansion of coal-powered steel mills accelerated sharply in the first half of 2021, exposing the government’s reluctance to sacrifice industry-fuelled growth to achieve its climate goals.
Analysis of Chinese government approvals by the Centre for Research on Energy and Clean Air, a Finland-based advocacy group, found that 18 steelmaking blast furnaces and 43 coal-fired power plants were announced in the first half of this year.
As steel prices surged, 35m tonnes of coal-dependent ironmaking capacity was announced in the first half of 2021, more than in all of 2020, CREA found.
If built, the combined coal and steel projects would emit about 150m tonnes of carbon dioxide per year, equivalent to the total emissions of the Netherlands.
The increase in blast furnace approval suggested that the “steelmakers haven’t gotten the memo yet” on carbon emission reduction, Lauri Myllyvirta, lead analyst at CREA, said. The sector will probably miss a 2020 target of limiting output in 2021 to the same level as last year.
Because steelmaking is the second-largest source of China’s carbon emissions, “I don’t see the maths for getting to carbon peak by 2030 without a 30 per cent reduction from steel”. The most plausible way for that to happen, he said, was by reducing output.
President Xi Jinping has pledged that China will reach peak CO2 emissions by 2030 and achieve net-zero emissions by 2060. But climate activists are concerned that this ambition is not reflected as clear targets in authoritative economic planning documents.
In a sign of the leadership’s caution towards restraining polluting industries, the Communist party’s Politburo this month warned against “campaign-style” efforts by local governments to reduce emissions.
Steel prices plummeted after it was announced that Tangshan, a big steel producing hub 180km east of Beijing, was expected to reduce limits on output.
The curbs on production were imposed this year after industrial pollution overshadowed the annual meeting of China’s national legislature in March.
Separate analysis by Greenpeace released this month showed that the majority of government-directed stimulus after coronavirus lockdowns was directed towards traditional infrastructure projects, which are a big driver of pollution.
Up to 90 per cent of Covid-19 relief national bonds went towards general infrastructure, while 60 per cent of new municipal bonds were spent on infrastructure such as construction, compared with 15 per cent on green, sustainable or low-carbon projects, Greenpeace analysis of disclosures found.
A summer of widespread power rationing caused by surging demand has added to Beijing’s hesitance to cut back on coal-fired generators, after local governments in manufacturing hubs such as Guangdong ordered factories to reduce operating hours to avoid shortages.
In recent weeks, the worst relapse of coronavirus cases, caused by the rapid spread of the Delta variant, since the virus first emerged in Wuhan has also started to weigh on growth.
“With the latest outbreak now threatening setbacks for the economy, we can expect more construction stimulus to offset that,” Myllyvirta said. “The conundrum of growth versus emissions goals is not going away as soon as we had hoped.”
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Most Asian shares slipped Friday as the spread of the delta Covid-19 variant and China’s regulatory curbs restrained sentiment despite another record high close on Wall Street.
The technology sector led losses on a slide in Chinese Internet giants and a retreat in chipmakers that hurt South Korean equities. U.S. equity futures were steady after the S&P 500 hit a fresh peak and the tech-heavy Nasdaq 100 rose. Airbnb Inc. slid in extended trading on a tough outlook due to the virus, while a surge in streaming demand boosted Walt Disney Co. U.S. Treasury 10-year yields were near a one-month high following a tepid 30-year auction and data highlighting price pressures and a recovery in the labor market. A gauge of the dollar held an advance.
The focus in China remains on Beijing’s push to exert more control over a range of industries. In real estate, the nation is suspendingprivate equity funds from raising money to invest in residential property development. Separately, a partial shutdown of a major Chinese port due to a virus outbreak stoked concerns about a repeatof last year’s pandemic shipping woes.
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Closing Stock Market SummaryThe S&P 500 (+0.3%) and Dow Jones Industrial Average (+0.04%) eked out another pair of intraday and closing record highs on Thursday. They were both down 0.3-0.4% in the morning following a Producer Price Index report for July that was worse than feared.
The Nasdaq Composite increased 0.4% as some money rotated back into large growth stocks, while the Russell 2000 (-0.3%) closed slightly lower.
Prior to the open, the Producer Price Index for final demand and the index for final demand, less food and energy, both increased 1.0% month-over month. The Briefing.com consensus was expecting 0.5% increases for both indices. On a year-over-year basis, they were running uncomfortably hot at 7.8% and 6.2%, respectively.
The higher prices for producers weren't an issue that seemed to worry the Treasury market, and in effect, the stock market due to a belief that inflation rates are peaking. The 10-yr yield increased three basis points to 1.37% after trading at 1.36% prior to the report. It's worth noting that initial and continuing claims both improved from the prior weeks.
Granted, there were more declining issues than advancing issues at the NYSE and Nasdaq, but what really mattered for the major indices was that the mega-cap stocks pulled their weight. Apple (AAPL 148.89, +3.03, +2.1%) and Microsoft (MSFT 289.81, +2.86, +1.0%) rose 2% and 1%, respectively, on no specific news.
The health care sector (+0.8%) was the best-performing sector, though, as weakness in the semiconductor stocks held back the information technology sector (+0.6%). The Philadelphia Semiconductor Index fell 1.1%. The energy (-0.5%), industrials (-0.2%), and materials (-0.2%) sectors also closed lower after outperforming the past two days.
The semiconductor space was pressured by weakness in Micron (MU 70.25, -4.78, -6.4%) after the stock was downgraded to Equal-Weight from Overweight at Morgan Stanley. The firm observed that DRAM conditions are losing steam.
Recapping some other moves, the 2-yr yield increased one basis point to 0.22%, the U.S. Dollar Index increased 0.1% to 92.99, and WTI crude futures decreased 0.2%, or $0.16, to $69.11/bbl. On a related note, the IEA cut its 2021 global oil demand forecast due to the spread of the Delta variant.
Reviewing Thursday's economic data:
- The Producer Price Index for final demand increased 1.0% month-over-month in July (consensus 0.5%) on the heels of a 1.0% increase in June. The index for final demand, less foods and energy, also increased 1.0% month-over-month ( consensus 0.5%), matching a similar increase in June. On a year-over-year basis, the Producer Price Index for final demand was up 7.8% on an unadjusted basis, versus 7.3% in June. That is the largest advance since it was first calculated in November 2010. The index for final demand, less foods and energy, was up 6.2% versus 5.6% in June.
- The key takeaway from the report is that producers are clearly paying higher prices, which could translate into profit margin pressure if they are not successful in passing through price increases to customers that offset their higher costs.
- Initial claims for the week ending August 7 decreased by 12,000 to 375,000 ( consensus 383,000) while continuing claims for the week ending July 31 decreased by 114,000 to 2.866 million.
- The key takeaway from this report is the decrease in both initial claims and continuing claims, as that is on point with an improving economy that is in need of more workers to fill open positions.
Looking ahead, investors will receive the preliminary University of Michigan Index of Consumer Sentiment for August and Export/Import Prices for July on Friday.
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