Under the Radar: Why China’s war on pollution is good for the metals industry

Under the Radar: Why China’s war on pollution is good for the metals industry

China announced and implemented aluminium production cuts this year as a result of anti-pollution measures, resulting in a worldwide spike in the metal’s price. Are producers from other countries ready to take advantage of this win-win situation created by China?

Curbs and cuts

The Chinese government has imposed a series of curbs on the construction and industry sectors after pledging earlier this year that it would get tough on notoriously bad winter smog. These curbs represent the government’s attempt to follow through on the “blue skies” programme, as well as a raft of supply-side reforms in the commodities sector.

Aluminium smelters and alumina refineries in and around 28 northern cities will be required to decrease output by 30%. Market watchers anticipate further legislation later in the season, when air pollution is usually at its worst.

Beijing already issued an orange smog alert – the second highest – in early November as levels of PM2.5, tiny particles measuring 2.5 micrometres or less, reached 158 micrograms per cubic metre or more than 10 times the recommended limit. In 2013, similarly bad levels of smog launched a national protest movement and pushed the government to establish a comprehensive plan to curb air pollution. That plan has already had some success: from January to November, 338 Chinese cities saw an average drop of 20.4% in PM10 compared with 2013.   

But China will need to curb polluting industries even further to hit key clean air targets. The consultancy CRU estimates roughly 2 million tonnes of primary aluminium capacity will be affected by government-mandated cuts this winter. This will involve almost 840,000 tonnes of production reductions over the next two quarters.

The Chinese government has also enacted a crackdown on unlicensed aluminium smelters. According to Citigroup, authorities have shut down nearly 4 million tonnes of illegal capacity (almost 15% of the total) across the country.

Coal for Christmas

Only 8 years ago, China condemned the fight against climate change as part of a vast Western conspiracy to stall economic growth. To understand the motivations behind today’s anti-pollution campaign, it is key to remember how Chinese firms produce their aluminium.

The vast majority of smelters rely on electricity generated by coal-fired plants for energy-intensive aluminium smelting. Low-cost coal fuel may have initially helped them get a leg up on their competition, but it has fallen out of favour as a result of the government’s shifting priorities. A decade ago, industrial expansion was all the rage. Nowadays Beijing cares much more about tightening environmental standards and has been  investing more than $100 billion every year in renewables. Green energy sources currently account for around a quarter of China’s energy mix.

The competition has also highlighted the gross inefficiencies of coal by switching to low-carbon energy sources. For example, Rusal – the world’s biggest aluminium producer outside of China – produces most of its aluminium using electricity generated from five vast hydropower plants in Siberia. Rusal and other firms that produce low-carbon aluminium (like Norway’s Norsk Hydro or Alcoa in the US) are counting on customers’ growing readiness to pay a premium for sustainable metals.

Rising tide lifts all boats

Beijing’s winter cuts are a boon for foreign producers already riding high on a wave of growing demand for “green” aluminium among manufacturers. Unsurprisingly, these producers are elated about China’s “blue skies” programme. They are expected to respond to reduced overcapacity by cranking up production to pick up the slack.

Another question looming over the industry is what approach Washington will take in response to Chinese aluminium overcapacity, which has risen to the top of the Trump administration’s agenda.

So far, it appears that the White House has not gotten the memo about Beijing’s efforts to curb overproduction and the resulting surge in aluminium prices. Last month, the administration took the nearly unprecedented move of “self-initiating” an investigation into whether Chinese aluminium companies were illegally dumping a product called “common alloy aluminium sheets”. For the first time in more than 25 years, the government did not rely on the private sector to initiate such a probe.

Though the move will affect only $603.5 million in imports, the significance of the action lies in its symbolism. It comes as the US is mulling a range of other measures, including whether to invoke national security considerations to raise wider barriers to Chinese metals imports. Trade analysts fear such moves could result in additional anti-dumping measures, quotas, or tariffs on not only Chinese but all foreign producers, such as Rio Tinto or Rusal (two of the biggest exporters of aluminium to the US). This will not just raise prices and roil the industry, but could also spark a retaliatory trade war and wreak havoc on the global economy.

A need for certainty

For metals industry insiders, a number of factors remain up in the air. For one, even as Beijing fights back against illegal producers, it is an open question how many will fire up their plants again after government inspectors depart. For another, though China is now clearly serious about curbing pollution, future production restrictions will depend heavily on the number of “blue sky” days the north enjoys in winter. Then there is the deep uncertainty surrounding the political context in the US and the potential reaction from China and other trading partners.

In any case, one thing is for sure: China’s war on pollution – and the US war on trade – is only beginning. Further major shifts in the aluminium industry are likely looming on the horizon. Nonetheless, the reduction in output has not changed the fact that China is (and will remain) the world’s largest producer of aluminium for the foreseeable future. The rest of the world will rightfully continue to look to China for any stabilising (or destabilising) market measures.

About Author

Nicholas Leong

Nicholas Leong is currently a trainee advocate & solicitor with Messrs Lai Mun Onn & Co in Singapore. A graduate of the University of Manchester and BPP Law School, he is also effectively bilingual in English and Chinese. Nicholas has long maintained a keen interest in East Asian military history and politics, with particular emphasis on early republican China, the legal and international status of Taiwan, and the impact of China's rise on ASEAN.