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How China’s focus on low emissions could affect industrial metals

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China has announced bold targets to reduce its carbon emissions, but the country will face significant policy challenges to end its heavy reliance on fossil fuels. The transition to a low-carbon economy is also likely to impact the demand and price of metals, such as copper, aluminum and steel.

Ambitious carbon emission reduction targets

President Xi Jinping announced to the United Nations General Assembly last September that China will achieve carbon neutrality by 2060, thanks to carbon dioxide. peak emissions before 2030. Even so, China’s heavy coal consumption is likely to be a hard habit to break. Coal represented 56.8% of China’s primary energy needs in 2020, with its coal production capacity amounting to 1,050 gigawatts. This figure represents 53% of global coal-fired electricity production, according to China’s National Energy Administration.

An immediate challenge facing China in going green is to be able to generate sufficient energy capacity to fuel growth, with Premier Li Keqiang setting the 2021 GDP target above 6%. A recent Fitch reviews The report says the country is dramatically increasing its green power capacity, increasing wind power to a record 71.7 gigawatts and solar power to 48.2 gigawatts in 2020, but it also added 38.4 gigawatts of coal-fired power. These developments have led to the abnormal situation where China is the world’s largest producer of solar and wind power while adding more new coal-fired power generation capacity in 2020 than the rest of the world combined.

The road to carbon reduction

Despite its ambitious carbon reduction targets, China’s latest five-year plan, released in March, does not outline measures to reduce its dependence on coal, but rather states that it “will rationally control the scale and pace. development of the construction of coal-fired power stations. firepower. Its recently published roadmap for the 2021-2025 energy transition provides more details, setting a target for non-fossil energy sources to represent 20% of the country’s energy by 2025, against 16% in 2020. China is also significantly expanding its nuclear power capacity, with the energy transition roadmap targeting a 40% increase in nuclear power from 50 gigawatts in 2020 to 70 gigawatts in 2025. But at the same time, China has announced that it will no longer offer subsidies for new solar power plants or onshore wind projects from August 1.

The impact of decarbonisation on raw materials

China’s decarbonization targets should have a significant impact in the industrial sectors that consume the most electricity, in particular the production of aluminum and steel.

Casting aluminum is very energy intensive. Although there has been some migration of the industry to parts of southwestern China, which benefit from hydropower generation, much of it still depends on coal for production. Aluminum prices peaked more than a decade in April after production was temporarily suspended in Inner Mongolia when the region failed to meet its energy efficiency targets. The industry already has an annual capacity cap of 45 million metric tonnes, and new fusion capacity is only allowed when it replaces the old capacity, with some analysts speculating that China may have already passed the peak of aluminum production.

Steel companies have also come under pressure to reduce their carbon emissions. Baowu Steel, China’s largest steel producer, has pledged to be carbon neutral by 2050. The two main ways in which steel companies can reduce their emissions are by using cleaner energy sources or by using scrap metal for production. Both approaches have limitations. The Chinese steel industry tends to use oxygen blast furnaces, which are more difficult to decarbonize than electric arc furnaces, while the availability of scrap in China is unlikely to be high enough to meet demand. It is also expensive.

Meanwhile, the focus on green energy is likely to increase demand for copper, which is a key component of renewable energy systems, such as solar and wind power plants, as well as electric vehicles. Global copper demand for solar and wind power systems is expected to increase 56% by 2027 from 2018 levels, according to a study by the International Copper Association (ICA). Although no breakdown is given for each country, China is by far the world’s largest producer of solar panels and wind turbines, suggesting that demand for copper will accelerate.

Outlook for commodities

With China focusing on meeting its carbon emissions reduction targets, expect volatility in the prices of the commodities involved. Demand for aluminum and steel is expected to remain strong at least in the short term, especially as the former is also used in solar panels, wind turbines and electric vehicles. But supply could be affected by policy measures targeting these energy-intensive industries. Meanwhile, the demand for copper is expected to continue to increase due to the key role it plays in manufacturing solar and wind power systems.

The impact of China’s energy transition on demand for coal is more mixed. While long-term demand will decline as China switches to green power, in the short term, demand is expected to remain high. In fact, the 14th Five-Year Plan calls for annual coal production to be capped at 4.1 billion metric tons. To put this in context, China’s coal production was 3.9 billion metric tons in 2020.

With potential uncertainty over the impact of China’s decarbonization ambitions on these commodities, key markets for “green metals” like copper and aluminum will remain closely watched.

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