China’s CO2 emissions have rebounded from a steep, but short-lived, fall due to the Covid-19 lockdown to reach a new record high, analysis of the latest quarterly data reveals.
Government stimulus measures introduced earlier this year to fire up China’s post-covid economy have seen steel production, in particular, ramp up.
The three-month period from July-September saw steel output in China – which is a source of significant carbon emissions – rise by 10%.
The surge in steel output has also exposed that China is likely going to miss its own targets to cut steel capacity by the end of 2020, with many provinces reporting steel production that far exceeds their capacity control targets.
The steel targets were set in 2017, following Chinese leader Xi Jinping’s signature policy of “supply side structural reforms”, which aims to wean the economy off its reliance on successive waves of construction-sector stimulus.
The steel industry is the largest coal consumer in the country, when upstream coal use for electricity generation and coking is included. It is also the largest electricity consumer and the largest source of air pollutant emissions, making it a key target in the government’s efforts to improve air quality.
The capacity reduction targets have been China’s response to complaints from other governments about “dumping” steel on the global market.
The key target set in 2017 was to limit China’s steel production capacity to no more than 1,000 million tonnes (Mt) per year, down from 1,130Mt/year in 2015. However, steel output is set to increase by 30% from 2015 to 2020, topping 1,000Mt this year, indicating that the actual production capacity is far above the targeted capacity.
Compared to the maximum output achievable under the capacity target, the “excess steel output” amounts to 200Mt. This is equal to two-and-a-half times the total output of the US’s steel sector. The “excess” CO2 emissions from China’s steel sector will be around 300Mt in 2020 – roughly equal to Poland’s total emissions.
China’s Ministry of Industry and Information Technology (MIIT) recently released a new policy document on steel capacity, accompanied by government criticism towards the provinces for “gaming the numbers” and loosening capacity controls to chase economic recovery.
China’s CO2 emissions from fossil-fuel burning and cement production have rebounded rapidly over the last quarter. They increased an estimated 3% year-on-year in the July-September period after falling approximately 8% in January-April – and around 25% during the weeks during the Covid-19 lockdown at the end of January.
These findings are based on Chinese official statistics and energy industry data. They align with new satellite-based estimates, published this week in the journal Science Advances, finding that China’s CO2 emissions returned to pre-pandemic levels after April – as my analysis for Carbon Brief first showed back in June.Three-month mean of CO2 emissions from fossil fuel burning and cement production in China, Q1 2015-Q4 2020. Source: Author’s analysis based on government data from China’s National Statistics Bureau and China Customs, plus energy industry data from Wind Information. Chart by Carbon Brief using Highcharts.
The latest quarterly data shows that coal consumption by the metal industry (which is dominated by iron and steel production) increased 6% and there was a 10% increase across the construction materials industry (mainly cement production). However, coal consumption stayed largely flat across the power sector and even fell, on aggregate, in other sectors. Overall, there was a 1% year-on-year increase in the consumption of thermal coal across China over the July-September period.
The data also reveals that cement output increased 5%, oil demand grew 3% and gas demand rose 4% year-on-year. Two thirds of the increase in CO2 emissions can be attributed to just two industries – steel and cement – when the growth in their electricity consumption is taken into account.
Managing steel capacity
China’s MIIT, which is in charge of managing steel overcapacity, published its “steel industry adjustment and upgrading plan” for 2016-2020 back in 2017.
The plan projected domestic steel consumption of 650-700Mt in 2020, down from 760Mt in 2013. It set a target of cutting steelmaking capacity from 1,130Mt in 2015 to less than 1,000Mt in 2020. The plan targeted steel production of 750-800Mt in 2020, down slightly from 804Mt in 2015 – 100Mt higher than projected demand, accounting for exports.
China does not report the country’s steelmaking capacity systematically. Instead, the average utilisation of capacity at large steel firms is reported, along with production. Utilisation is defined as the ratio of actual output to capacity, so the amount of existing capacity can be roughly estimated based on the two time series.China’s steel output, capacity control target and estimated actual capacity; million tonnes per year. Source: Steel production and capacity utilisation from National Bureau of Statistics; 2020 projected based on the first 10 months of data. Estimated capacity calculated by the author. Chart by Carbon Brief using Highcharts.
In 2016 and 2017, this implied capacity fell in line with the new target, as steel production increased slightly and reported utilisation rose faster than production, indicating that capacity cuts were implemented successfully.
However, in 2018, steel production started to surge much faster than the reported capacity utilisation, indicating that steel firms had started to add capacity, perhaps getting better at skirting the government’s controls. By 2020, the gap between the capacity control target has widened to well over 200Mt.
Translating this into CO2 emissions, current emissions from the sector are approximately 300Mt higher that the maximum emissions under the capacity control target, even assuming very high capacity utilisation.Estimated CO2 emissions (Mt) from steel production in China, calculated based on steel output. The maximum emissions under the capacity control target are calculated assuming a very high utilisation rate of 85%. Source: Author’s calculations based on data from the National Bureau of Statistics and average energy consumption per tonne of steel reported by China Coal Industry Association and compiled by the author from news reports. Chart by Carbon Brief using Highcharts.
Hebei – the heavily industrialised province surrounding Beijing and the prime focus of China’s efforts to address air pollution – took the lead in implementing these cuts, pledging to deliver one third of the targeted cuts in 2016 and to cut total steelmaking capacity from almost 300Mt in 2016 to 200Mt in 2020.
However, Hebei’s steel production is set to reach a record 250Mt this year, up from 188Mt in 2015, showing that actual capacity is closer to 280Mt. The gap between this actual capacity of reported steel production and the capacity target is almost equal to the annual steel output of the US – and responsible for a third of the gap in China’s national steel numbers overall.
Hebei’s reported steel production far exceeds the amount of steelmaking capacity the province claims to have – and the gap has widened over the past two years. Taking into account that it is not possible for steel plants to produce at full capacity around the year, I have calculated the “minimum actual capacity” based on assuming a very high average operating rate of 85%. This conservative calculation makes the gap even wider.Hebei’s steel output, capacity control target and estimated actual capacity (Mt). The minimum action capacity is calculated assuming a very high utilisation rate of 85%. Source: Steel production from National Bureau of Statistics via Wind Financial Terminal; 2020 projected based on the first nine months of data. Chart by Carbon Brief using Highcharts.
From 2015 to 2019, Hebei reported closing a significant 74Mt of steelmaking capacity, with another 14Mt due to be closed this year.
Hebei’s contradictory numbers make it clear that steelmaking capacity has reached a scale where it is making the capacity reduction targets virtually meaningless.
The MIIT recently invited comments on a policy document called “updated work plan for steel capacity replacement“. The document exposes the problems in the implementation of the capacity control policy, reporting that 165Mt of steelmaking capacity was closed down from 2018 to 2020 and replaced by 139Mt of new capacity. This implies that for every 1.15 tonnes of capacity closed, one tonne of new capacity was added.
With the current focus on economic recovery following the Covid-19 shock, some local governments have loosened controls and increased steelmaking capacity. The new policy plan aims to prevent local governments from “gaming” the numbers and hopes to correct the inaccuracies in the reporting of steelmaking capacity. It requests at least a 1.5:1 replacement ratio in air pollution controls in the key regions, including Beijing-Tianjin-Hebei, Shanxi-Shaanxi-Henan, Yangtze River Delta and Pearl River Delta – and 1.25:1 for the rest of the country.
One key issue is that the capacity control targets only deal with “registered” capacity. A certain amount of capacity is outside the official lists of registered capacity issued by MIIT.
Steel firms are also expanding capacity in production by reporting the closure of old production lines or units that have been out of operation for a long time, but still remain technically “on the books”, and replacing these with brand new production capacity. Many of the announced “replacement” projects do not appear on the ministry’s lists of registered capacity, which means that they are likely circumventing the capacity control system, or possibly operating without proper supervision.
As China finalises its next five-year plan – due out next year – and prepares to implement its new 2060 carbon neutrality target, the failure of steel capacity control is a warning sign about the staying power of emission-intensive industry interests.
The construction-driven recovery from Covid-19 has further increased the country’s reliance on government-directed projects for economic growth.
From the Chinese policymakers’ perspective, the demand for steel has proved far more resilient than expected in the wake of the industrial downturn of 2014-15. However, this increased demand for steel was created by government policies stimulating infrastructure projects and real estate. Local governments control the demand for steel, just as much as the supply.
The missed steel capacity targets are evidence of both the political power of the industry, as well as China’s continuing economic reliance on construction and heavy industry to fulfill economic growth targets. Steel output has outpaced GDP growth in 2018, 2019 and 2020, showing that this dependence has only increased.
The expected rebound of consumption and services next year present an opportunity to chart a different economic path.
Xinyi Shen contributed research.
Analysis: Surge in China’s steel production helps to fuel record-high CO2 emissions
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