China raises efficiency targets for energy-intensive industries

Eric Ng writes on the South China Morning Post that higher energy efficiency bars have been set in China for companies in sectors ranging from oil refining to non-ferrous metals smelting. The new policies will ‘amplify the trend of the strong getting stronger’, analyst says

 

Climate Change: China’s new five-year energy efficiency targets to drive heavy industry consolidation, analysts say

Beijing’s announcement of five-year energy consumption reduction targets for 17 energy-intensive industries to drive the reduction of carbon dioxide and other pollutants will spur industry consolidation, analysts said.

According to a joint circular published on Friday by regulators overseeing industrial development and environmental and energy policies, higher energy efficiency bars have been set for companies in sectors ranging from oil refining to non-ferrous metals smelting.

For example, steel, cement, coal-to-chemicals, aluminium smelting – among the country’s biggest carbon dioxide emitting industries – must all meet certain minimum standards by 2025. Currently, some 20 to 40 per cent of their capacity fails to do so.

Companies whose energy efficiencies are below the minimum standards are urged to install advanced equipment and adopt new technology such as recycling of waste heat, according to the circular, which was issued by regulators led by the National Development and Reform Commission (NDRC).

Those that have difficulties meeting these standards before the deadline should be phased out through market-based means, it added.

Analysts said they expected the biggest players to gain market share from the phasing out of the weakest players, which will not have the financial resources to make the facility upgrades needed to avoid shutdowns.

“This kind of winners-in, losers-out concept will amplify the trend of the strong getting stronger,” Essence Securities analyst Zhang Wangqiang said in a note on Sunday.

Besides minimum standards targets, higher proportions of the industries’ capacity will need to attain certain industry-specific energy efficiency benchmarks, which are substantially higher than the minimum standards.

For example, the share of capacity meeting the benchmarks in the cement, steel and aluminium sectors will be lifted to 30 per cent by 2025 from between 4 and 10 per cent at the end of 2020.

For the oil refining and petrochemical industries, there is no strict 2025 industry exit requirement for the 20 to 30 per cent capacity that has failed to meet the minimum standards. They are only urged to quicken facility retrofitting.

The latest 2025 targets come close on the heels of another circular issued in November by the NDRC, spelling out minimum standards and benchmarks for these industries that took effect on January 1. At the time, a three-year phase-out window was suggested for the least efficient plants.

Shares of some key players tumbled on Monday. Shanghai-listed Baoshan Iron and Steel, China’s largest listed steelmaker, lost 3.1 per cent to 7.43 yuan, while industry-leading cement maker China National Building Material fell 2.3 per cent to HK$11.08 in Hong Kong.

China’s steel and cement sectors are each responsible for about a sixth of the carbon dioxide emissions within the country, which is aiming to peak its carbon emissions by 2030 and become carbon-neutral by 2060 to help fight climate change.

Diligence of local government officials in implementing Beijing’s targets will be key to emission reduction results, said Liu Qian, senior climate and energy campaigner at Greenpeace.

“This regulatory effort will need to play out on the provincial and municipal level. I’d be interested to see how quickly they release follow-up regulations, [and whether] the local governments drag their feet,” Liu said.

Meanwhile, companies that make energy efficiency-enhancing equipment are expected by investors to benefit from these policies.

Shenzhen-listed Luyang Energy-Saving Materials, which makes industrial energy-saving products such as insulating firebrick and thermo-insulation fibres, gained 1.4 per cent to 20.79 yuan, bucking a 0.84 per cent decline in the Shanghai Composite Index. Its stock has gained 87 per cent in the past year.

The Shandong province-based firm is forecast by Industrial Securities’ analysts to see net profit grow 22 per cent this year and 20 per cent next year.

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