Green Mandates may finally stop China's steel expansion: S&P

HONG KONG -- China's ambitious climate goals should propel its steel industry to stop expanding, says ratings agency Standard and Poors, which believes the financial burden of investing in cleaner production will force out steel producers.

"The green agenda puts steel mills in a bind," said S&P Global Ratings credit analyst Christine Li.

"Large capital expenditures to upgrade equipment will cripple steel mills with high leverage and weak profitability. However, if they don't invest in decarbonisation, producers could be shut down for not meeting national standards on environmental protection."

The S&P report says: "China has committed to reach peak carbon emissions by 2030 and neutrality by 2060. In our view, the country cannot keep its carbon-neutral promises without requiring a clean-up in the steel industry.

"Steel is the largest carbon emitter among the manufacturing sectors, and contributes about 15% of total carbon emissions in China.

"We estimate that China's steel industry - -the world's largest -- will invest RMB 500-850 billion (US$77-US$131 billion) on green upgrades over the next five years.

"Much of this will go toward switching to electric arc furnaces, which emit less carbon dioxide than blast furnaces."

S&P says the S&P-rated steel players have been first movers, investing 20%-25% of annual capital expenditure upgrading facilities to meet environmental standards. "We anticipate their costs will remain high, but add a smaller 10% to annual capex over the next few years."

Producers that have not invested in retrofits could face production curbs or other disadvantages.

"In our view, the green agenda adds to impetus to cut steel capacity. Excess supply is a chronic risk and drains earnings potential for the sector.

"The industry is less fragmented than in the past, but total capacity will likely hit a fresh record of 1.35 billion tons this year."

S&P says the Chinese Government targets for top-10 producers to have 60% market share by 2025, from 39% as of end-2020.

"Fewer larger steelmaking groups will make it easier for the Government to implement policies, control capacity increases, and carbon emissions," said Li.

"As players consolidate or exit the market, overall crude steel output will gradually decline. We project output will peak in 2022, and plateau for several years before gradually declining."

www.standardandpoors.com (ATI).