A worker pries molten cast iron from a blast furnace at a Dongbei Special Steel Group Co. Ltd. plant in July 2018 in Dalian, China. |
The European Union's Carbon Border Adjustment Mechanism may reduce the cost advantage of importing Chinese steel and aluminum products over time despite limited near-term impact, analysts said.
The EU will start transitional phases of Carbon Border Adjustment Mechanism (CBAM) on Oct. 1, running until the end of 2025, as part of efforts to prevent carbon leakage, where companies shift production to regions with looser environmental regulation. CBAM will impose tariffs on carbon-intensive imports into the EU, initially covering six sectors including aluminum, and, iron and steel.
China was the EU's biggest steel supplier
China's CBAM exposure may rise further given higher carbon intensities in its production of ammonia and iron and steel products compared to the global average. Despite efforts to scale up renewable energy, China's power generation remains heavily dependent on coal: Global Integrated Energy Model, a product of S&P Commodity Insights, forecasts power generation will contribute about two-thirds of the country's total emissions from coal between 2026 and 2040.
CBAM's impact on the Chinese steel and aluminum supply chain might not be immediately evident because less than 1% of China's total steel and aluminum production is exported to the EU, an analyst from think tank Transition Asia said in an email. However, China could encounter severe challenges if CBAM's scope extends to more downstream and finished products such as vehicles and consumer goods that use steel and aluminum components, the analyst said.
Companies are only required to report emissions embedded in their products in the transitional period without paying for them before 2026. However, CBAM will be gradually phased in from January 2026, and importers will need to pay full-level CBAM fees in 2034. This is expected to increase the EU's
It's still unclear how much of the CBAM fees EU importers would pass on to metal producers, but companies' export costs will rise in the longer term, Song Yutong, carbon analyst at Refinitiv, told Commodity Insights.
Limited impact on aluminum
According to current regulations, CBAM will only apply to direct emissions for nonferrous metals, which means it will not look at companies' energy mix, a representative of Aluminum Corp. of China Ltd. told investors on Aug. 23. The direct impact of CBAM will also be limited, as it mainly covers downstream aluminum articles, the representative said.
However, the EU has not ruled out the possibility of including indirect emissions from electricity generation once it collects emissions data and reviews the scope of CBAM after the transition period, Refinitiv's Song said. Including energy-related emissions might have a significant impact on the aluminum sector in the longer term.
China accounts for nearly 60% of the world's primary aluminum production, according to the International Aluminium Institute. Most emissions from primary aluminum production came from power consumption, with coal fueling around 82% of the electricity that powered the country's aluminum smelters in 2021, the institute said, while noting that the global average is just 57%.
Calls for expanding China's carbon market
CBAM's implementation adds more urgency to expanding China's carbon trading market, which currently only applies to the power sector.
"We hope China will accelerate the expansion of the national emissions trading scheme to cover steel," Fu Jianguo, vice president of Baoshan Iron & Steel Co. Ltd., China's largest listed steelmaker, told investors on Aug. 31. Baosteel hopes the central government uses carbon tax revenue to support the steel industry, including investment in low-carbon metallurgy and transition to low-carbon electric arc furnaces, according to Fu.
China's steel industry is facing a huge challenge because 90% of domestic steel production uses blast furnaces, which require massive investment and time to renovate, Fu said. That and a lack of policy support mean the green steel transition in China is not economically viable at this time, Fu said. In comparison, European companies have a clear timetable for their green transition, spurred in part by the EU's high carbon tax.
Companies in China might be able to offset part of CBAM fees if they have paid carbon prices in the domestic emission trading market, but that route hinges on whether the EU will recognize China's carbon pricing system, which allocates emission allowances free of charge, Refinitiv's Song said.
Additionally, China's carbon market still lacks data from the steel industry to allocate carbon emission allowances and carbon audits, Baosteel's Fu said. The steelmaking process is longer and more complicated than electricity production, so it's more difficult to collect standardized data for carbon calculation, the executive added.
Transition Asia expects CBAM implementation would push China to build more renewable energy in its aluminum sector and offer incentives for steelmakers to shift to electric arc furnaces.
"The challenges associated with policies like the CBAM are just emerging," the analyst said. "There's a global effort to establish international carbon borders."
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