China and the environmental paradox

Bernardo Velázquez; Expansión. 06-06-2016

The resolution that the international community passed in Paris in December 2015 against climate change could be crucial for future generations. Unfortunately, the resolution, still pending ratification, did not include clear commitments to limit CO2 emissions.

Since the United Nations Convention to combat climate change was passed in Rio in 1992, the EU has been its great champion. After the Kyoto Treaty, in the hope that the United States and other major countries would follow our example, as Europeans we have limited the emissions of our European companies. This idealistic and unilateral approach has favoured energy efficiency and the cleaning up of European industry and has contributed to reducing our emissions. For example, the Acerinox plant in Algeciras emits 273 kilos of CO2 per tonne of stainless steel produced while the world average is 440 kilos.

However, these environmental constraints also imply that European industrial companies- especially those which consume a lot of energy, such as in the steel industry- have to bear some environmental costs that producers from other parts of the world are not subjected to. This puts us at a disadvantage.

A case that is particularly relevant in the steel world is that of China. We do not know for sure the current level of emissions in China, as its latest emissions inventory is from 2005 (while in Europe we already have figures for 2014 and the 2015 figures will be available soon). However, there is little doubt that China is currently the greatest emitter of CO2 in the world.

Without environmental restrictions as in other parts of the world, and spurred by the growth of domestic demand in recent years, Chinese steel production has grown very rapidly in the last two decades. Fifteen years ago China produced just 3% of global stainless steel production, but it now produces more than 50% worldwide. The same has occurred in the steel sector in general. As a result of this growth, China has managed to reach a production level of some 500 kilos per inhabitant.

Since its economy has begun to cool down, China has been unable to absorb its own production, which demonstrates its enormous productive overcapacity (which in the case of steel has been estimated at 200 million tonnes per year). As a result, China has started flooding the planet with its steel, and at unexplainable prices by its production costs.

What is the problem?

Unfortunately, the vast majority of consumers and steel buyers, including industries and administrations in many countries, buy solely based on price and do not take into account another aspect of great influence over the environment: how much CO2 the manufacturing company has produced.

The environmental paradox emerges when buyers decide to replace European steel for cheaper, imported Chinese steel. It isn't only that the manufacturing of this product in China has flooded more CO2 into the global atmosphere than if it had been manufactured in Europe, but that in addition to those emissions at source, other emissions produced during transport by ship to Europe must be added, representing in the order of some 20% more.

Hence the paradox: Chinese super production, its effect on prices, and displacement of production from countries with cleaner industries, in addition to generating other adverse consequences in the European Union, such as industrial employment losses or reduced tax collection, all add to an increase, in net terms, of global CO2 emissions around the planet. Thus, this discrepant application of the laudable European standards to combat climate change to all manufacturers competing in a global market, paradoxically, and without trying, is capable of increasing the total amount of CO2 emissions on the planet!

The solution would be to consider environmental or sustainability issues during public and private purchases, accepting the fact that responsible production entails environmental and social costs. This would also require an adjustment in Chinese production, since closing inefficient plants would do away with the global imbalance and environmental dumping.

Furthermore, it is striking that the European Union is debating granting MET to China, a country where foreign investments cannot be made without a Chinese majority shareholder, and with tight control over its currency, tax elimination on producers when exporting and direct or covert subsidies of all kinds. China's economy is controlled by the state, which does not let market forces do their work.

The European Union has imposed certain anti-dumping measures against Chinese imports, though the real solution to this problem would require that Chinese companies operate according to market rules and that country authorities properly manage the problem of overcapacity which, unfortunately, does not only affect the steel industry.

Europe must support its industry, for the quality of employment it generates and because it is the most environmentally friendly. We are not asking for protection, but for the same rules of play for all who compete in a global market. With equal conditions, it will become clear that the European steel industry is sustainable and highly competitive.

The Paris Agreement may be crucial for future generations, but at the moment it has feet of clay. Let us hope that there is time to give it a good stainless steel prosthesis.

Bernardo Velázquez, ACERINOX, S.A. CEO