China’s ‘blue skies’ dreams mean red flags for industrial metals: Andy Home

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By Andy Home | LONDON

“We will make our skies blue again”.

That was the rallying call issued by Chinese Premier Li Keqiang at the start of the country’s annual meeting of parliament.

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Any lingering doubts that air pollution has moved to the very top of Beijing’s political agenda should be dispelled.

Targets have been set to reduce pollution in Beijing and Tianjin as well as 26 other cities in the provinces of Hebei, Shanxi, Shandong and Henan.

Detailed instructions have been issued for everything from installing monitoring stations for car emissions at heavily used junctions to “boiler remediation”, including the elimination of all coal-fired stoves.

Compliance is mandatory, Chinese style.

“Officials who do a poor job in enforcing the law, knowingly allow environmental violations, or respond inadequately to worsening air quality will be held accountable,” Li warned.

In essence, the ambition is to eliminate coal usage in the “2+26” cities and dramatically cut the emission of just about every other pollutant.

One component of “The 2017 Work Plan for the Prevention and Control of Air Pollution” has already sent the aluminum price soaring as analysts try to work out the implications of enforced capacity cuts over the winter heating period, which runs from mid-November to mid-March.

But the potential disruptive effects of Beijing’s full-out war on pollution will run the gamut of the industrial metals spectrum.

China has spent decades building its industrial production capacity. Pollution now trumps that policy and the resulting flow-through impacts will affect pretty much everything, not just in the “2+26” cities.


Coal, steel and aluminum have grabbed the immediate headlines resonating from Li’s “blue skies” speech.

In the case of the first two, the pollution drive will dovetail with existing policies aimed at reducing excess capacity.

The official target is to cut steel capacity by 50 million tonnes and coal by 150 million tonnes this year as part of a five-year target of eliminating around 150 million and 800 million of capacity respectively.

A new order that steel production-hub cities such as Shijiazhuang, Tangshan, Handan and Anyang halve capacity over the winter heating season will accelerate that drive.

Indeed, “resolving” excess steel capacity in the “2+26” cities comes first on the list of measures in the “Work Plan”.

Second is the banning of all illegal “small, scattered, chaotic, polluted” plants in industries as diverse as metals fabrication and furniture manufacture.

In China’s steel sector this means tracking down and eliminating small scrap operators, using induction furnaces. Most of these exist off the official radar so we don’t know how much they produce, but 13 cities are tasked with banning them by October with the rest committed to removing half by then.

By all means necessary, it seems, since the policy document envisages both the physical demolition of plants and the cutting of water and power supplies.

Where steel leads, aluminum might well follow.

Although the new directive stipulates capacity reductions only over the winter heating season, the extra costs may mean some older, higher-cost capacity closing permanently.

As with steel, this would have the added benefit of alleviating international pressure on China to reduce excess capacity and high export flows.


The most recent measures, however, mark no more than an acceleration of an anti-pollution drive that has been quietly gaining momentum for many months.

An ongoing visit by environmental inspectors to Sichuan, for example, has resulted in the suspension of all lead-zinc mines, two zinc smelters, several silicon producers and a variety of aluminum product operators, according to Shanghai Metals Market (SMM), a Chinese news provider.

Last month’s visit to Henan caused the closure of all secondary lead producers and the partial suspension of operations at primary lead producers and battery manufacturers.

Another environmental audit in Hebei has hit both copper scrap processors and product manufacturers and zinc-steel galvanizing lines.

SMM’s snapshots delineate the ever-widening dragnet being used by Beijing to eliminate the excesses of past industrialization.

The effects on international markets and pricing may not always be as obvious as the aluminum and steel capacity reductions.

But they are increasingly affecting narratives.

Take iron ore, for example. With the spot price now back above $90 per tonne, focus has once again turned to the potential for production restarts, particularly in China itself.

Simple economics would suggest that smaller-scale, privately owned operators ramp back up to reap the benefits of a higher-price environment.

But stricter and more regular environmental checks and the costs of complying with new anti-pollution measures mean that price alone is no longer the key determinant of restarts.

It’s a similar tale in zinc, where the combination of higher pricing and a squeeze on raw materials would in the past have guaranteed the swift reactivation of Chinese “swing” mines, many of them also small and privately owned.

This time, though, they too will have to make sure they tick all the boxes required by Beijing’s pollution police, an added cost that can no longer be negotiated with local officials.

All the local environmental audit teams have been disbanded and, as the “2+26” city directive warns, if any local official, department or government is found wanting in anti-pollutant enthusiasm, “suggestions for accountability should be made”.


The war on pollution will affect all parts of China’s massive industrial materials sector.

But it’s the upstream impacts that are most pertinent in terms of supply-demand dynamics and pricing.

The country may be the world’s largest buyer of industrial metals but it is also a major producer.

A dominant producer in sectors such as steel and aluminum, where the shockwaves still travel down the global supply chain.

And a “swing” producer in markets such as zinc, copper and iron ore, where China’s unregulated small-scale mine sector has played a key, albeit poorly visible, balancing role in the past.

That’s starting to change and the transformation will not stop until the skies over Beijing are blue, and not just when the National People’s Congress meets.

(The opinions expressed here are those of the author, a columnist for Reuters.)


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