To cap emissions by 2030, China must strengthen steel
China has pledged to cap its carbon emissions by 2030, but its demand for steel – which happens to be the country’s largest energy-consuming industry – remains voracious. Meanwhile, steel prices have skyrocketed in 2021, helping to lift shares of companies like US-based Nucor to new highs.
Beijing has proven its ability to temporarily curb steel supply in the past and is doing so again now; this is one of the reasons the prices are so high. But the medium-term outlook for both prices and emissions largely depends on the ability to fundamentally slow demand growth. To succeed, it will need to divert the economy away from housing and construction, a long-held goal that has so far proved elusive.
The iron and steel sector is by far the biggest industrial energy pig in China – accounting for 13% of the country’s total energy consumption in 2018, the latest year for which annual figures are available. And other heavy industrial sectors like non-ferrous metals, cement, glass and chemicals – which like steel tend to follow housing demand – together account for about a quarter of energy use. . Despite the huge economic changes of the past decade, a quick glance at a graph of China’s energy demand versus housing construction and steel production shows that, in some ways, the bigger things are. change, the more they stay the same.
Of course, Beijing’s ability to meet its emissions targets will depend on the type of energy used, not just how much. But with coal still reaching 57% of total energy supply in 2020, it’s hard to see how China can reach peak emissions in 2030 without both huge investments in clean energy and without significantly curb growth in heavy industrial sectors linked to housing that depend on it. for nearly 40% of total energy demand. The overall energy efficiency of the Chinese economy continues to improve, but the pace of progress has slowed considerably since 2016, in part because real estate investment has rebounded since the real estate crash of 2014 and 2015.
Beijing has many other reasons for trying to sidetrack the housing economy and has taken some important steps over the past year: cap banks ‘exposure to the real estate sector and further restrict developers’ ability to capitalize on it. But the main drivers of housing demand – and steel – can be more difficult to address. To an even greater extent than in other major economies, Chinese households view homes as investments – in part because stocks are seen as too volatile and capital controls limit investment options to the foreign.
As long as Chinese families view second or third-party homes as a better investment than stocks, and regulators continue to restrict fixed-income options like bank wealth management products, China may struggle to really contain the price. housing sector – and growing demand for steel and energy. Investors and activists worried about emissions or demand for commodities should realize that financial sector reform can be just as important as industrial measures to contain Chinese emissions.
Write to Nathaniel Taplin at [email protected]
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