China's consent to cut greenhouse gas emissions triggers a rise in global steel prices
Dmytro Vidsota, Robinson Patman Law Firm, Managing Partner
Since the end of 2015, when the leaders of the world's most developed countries signed the Paris Agreement on measures to reduce carbon dioxide emissions, the climate theme has given new impetus to the global agenda for sustainable development. More than 60 countries have declared their carbon neutrality by 2050 – an agreed deadline that scientists believe must be met to avoid the worst climate catastrophe in human history.
Countries that have embarked on a course towards carbon neutrality have already begun to work in two directions: to reduce emissions of CO₂ and other greenhouse gases in the production of goods and their transportation, and also to offset emissions through additional projects.
However, until recently, the future of the Paris Agreement was in question due to the position of the largest air pollutant in the world, i.e. China. Several dozen countries that signed the Paris Agreement remained in the minority before the PRC, which currently accounts for 30% of the world's carbon dioxide emissions.
China has refused to sign the Paris Agreement in full on the grounds that as an emerging economy it should not bear the same burden of reducing emissions as developed countries, which pollution has remained uncontrolled for decades.
But in September last year, Chinese leader Xi Jinping, after lengthy negotiations, finally confirmed China's readiness to fulfill all the basic conditions of the Paris Agreement.
At the same time, a road map was coordinated for the transition from the current model of the China’s economy (based on the use of ‘dirty’ energy carriers and uncontrolled emissions of greenhouse gases into the atmosphere) to ‘carbon neutrality’. In accordance with the agreements concluded in September last year, China will begin a global transformation of the economy in 2021, but until 2030, as part of the previously approved development plans of the PRC, the level of carbon dioxide emissions will increase and then will have declined over the next 30 years. China plans to achieve carbon neutrality by 2060, 10 years later than other parties to the Paris Agreement.
Nevertheless, until recently, experts doubted that China would soon dare to take any decisive steps within the framework of the agreements concluded, and this despite the largely declarative statements about plans to reduce excess production capacity, sounding from the high tribunes in the PRC since 2016. But in May of this year, it became clear that the Celestial Empire had reached a kind of tacit compromise with the ecological ‘Paris Club’ and was ready for decisive action.
China's first step was, no more and no less, to cancel VAT refunds on exports of 146 types of metal products from May 1 of this year. In particular, since the beginning of the month, the Chinese authorities have canceled the 13% VAT refund for their manufacturers on the export of hot-rolled steel, wire rod and rebar. At the same time, China lowered import duties on cast iron, scrap and semi-finished products used in steel production to zero.
The PRC Ministry of Finance expects these measures to reduce the cost of imports, increase the volume of imports of ferrous metals and put pressure on domestic steel production, guiding the industry to reduce overall energy consumption, contributing to the transformation and quality development of the steel industry.
The PRC plans to focus on reducing the production of ‘unsustainable’ steel at outdated factories with poor environmental performance in order to ensure a decrease in steel production in 2021. This was recently announced by the National Development and Reform Commission of China (NDRC) and the Ministry of Industry and IT of China (MIIT).
Let me remind you that China is the largest steel producer in the world (in 2020, Chinese steelmakers increased steel production by 7% compared to 2019 – to 1.065 billion tons). Accordingly, any change in the state regulatory policy of the PRC has a direct impact on world markets.
In the long term, the decision to abolish the VAT refund should lead to a decrease in the sale of cheap ‘green’ steel products for export, and, consequently, to a decrease in the production of such steel products and an increase in the production of ‘carbon neutral’ steel. Obviously, in addition to a significant reduction in greenhouse gas emissions into the atmosphere, such a decision will stimulate the modernization of production processes at factories, and will have a positive effect on the environmental situation.
But in the short term, such a decision has already provoked panic in the global steel market. Chinese exporters are forced to increase steel prices, which gives rise to other steel producers to increase prices. In particular, at the beginning of the second decade of May this year, the price of Turkish rebar increased by about USD 100 per ton, to more than USD 750 per ton FOB compared to mid-April.
Obviously, as a result of the rise in price of Chinese steel, the share of its export sales will significantly decrease, and a reorientation of consumers in the global steel market will take place. However, such changes are inevitable.
It is important to say that the example of China is far from unique. Regulatory pressure on the metallurgical industry around the world increases every year, including in terms of requirements for the content of harmful substances in the production of a ton of a particular metal.
And while developing countries (including Ukraine) strive to obtain the cheapest steel possible, in developed countries an increasing number of consumers refuse to work with suppliers whose activities are associated with significant emissions of harmful substances into the atmosphere. Many brands in sectors such as automotive, mechanical engineering, aircraft and construction are committed to minimizing their carbon footprint and achieving zero CO₂ emissions.
These are the challenges facing steel giants along the chain, which are forced to invest billions of dollars in the development and production of environmentally friendly products today in order to maintain a customer base. As a result, the largest metallurgical companies in the world (Nippon Steel, Sumitomo Metal Industries, Arcelor Mittal, etc.), along with the limitations, see this challenge as new opportunities and rely on innovative methods of metal smelting and have already begun decarbonizing the entire supply chain.
As you can see, the task of slowing global warming constantly increases the political overtones of issues that were previously viewed as purely economic, affects world markets and inevitably becomes part of the business strategy of those corporations that see their future in the 21st century. In this context, the position of metallurgists – the national business establishment, its readiness to meet the changing realities of the new – ‘carbon neutral’ – world will be of fundamental importance for the future of Ukraine's economy.