China Must Choose Between Inflation or Pollution From Steel

China’s vast steel sector is the scene of a conflict between growth and a green agenda that points to wider challenges as President Xi Jinping tries to clean up the world’s top carbon emitter.

The government is pushing for steel output to drop from a record of more than 1 billion tons, in a campaign triggered by Xi’s pledge to deliver a carbon neutral economy by 2060. But early moves to squeeze steelmakers have fired up prices and created a headache for policymakers fretting about surging inflation.

The clash of priorities was evident in Premier Li Keqiang’s recent call for stronger controls on commodities markets. His comments followed data that showed producer prices rising in March at the fastest pace since July 2018, a trend that could impede the economy’s recovery.

Top executives from industrial materials firms, including steelmakers, have been called into government meetings to discuss why prices are rising and how to respond, according to people familiar with the matter. Steel mills have enjoyed a surge in profitability and the biggest, Baoshan Iron & Steel Co., has seen its Shanghai-listed shares advance almost 40% this year while the benchmark index has edged lower.

“With steel, they really have no-one they can blame but themselves,” Atilla Widnell, managing director of Navigate Commodities, said by phone from Singapore. Trying to keep production in check alongside stimulus-fueled demand has inevitably meant much higher prices, he said.

Steel coil in China, used in everything from cars to buildings, is the priciest it’s been since 2008. Aluminum, also the subject of carbon policies, has reached decade-highs. Strong demand is playing a big part along with supply cuts, as China’s economic rebound from the pandemic is heavily dependent on commodity-intensive sectors like construction.