China orders power cuts for carbon cuts

Updated September 9, 2010 21:13:51

China's efforts to reduce its air pollution usually attract praise - but now they are copping criticism from within China itself. Authorities are ordering power cuts and factory shut downs in an all out effort to meet a 20 per cent carbon reduction target by the end of the year. Steel mills are especially hard hit and prices are likely to rise. Households aren't being spared, and demand for Australia's iron ore and coal could also be affected.

Presenter: Karon Snowdon, finance correspondent
Speakers: Professor Pan Jiahua, director, Institute for Urban and Environmental Studies, Chinese Academy of Social Sciences; Andrew Dale, director, materials and energy research for Asia, Macquarie Bank, Hong Kong

SNOWDON: China's eleventh five year plan focussed on energy efficiency and emission reductions - cuts of 20 per cent per unit of production by the end of December.

But it's the wrong policy and the target is set too high according to a government adviser.

Professor Pan Jiahua is the director of the Institute for Urban and Environmental Studies at the prestigious Chinese Academy of Social Sciences.

Speaking via a poor mobile phone connection outside a meeting, he says the target is too ambitious.

But a determined central leadership has ordered it met at all costs.

PAN: It is too ambitious to me. And then the Chinese leadership is very determined, so it has to be implemented, which brings a lot of difficulties to industries and households. So, it's a difficult issue for the Chinese government.

SNOWDON: Professor Pan says local governments are falsifying their results and he suggests this could be avoided with a more reasonable target of 15 per cent.

He argues for a system of self regulation, plus an end to blackouts affecting households.

PAN: The command and control approach is not that good at all. And also basic living should be guaranteed because to cut off electricity supplies to households to meet the emission targets is very inappropriate.

SNOWDON: On the industry front, steel, cement and paper making factories are facing blackouts and closing their doors temporarily.

The world's biggest steel maker might be facing production cuts of between 10 and 20 million tons, or five to ten per cent, this year.

Andrew Dale, the Macquarie Bank's head of materials and energy research for Asia, says the biggest impact will be felt this month.

DALE: Other things at play are the fact that the profitability of the industry is quite fine at the moment, so you've got two factors bringing down steel production. So, we'd expect to see a further weakness into September, absolutely.

SNOWDON: And is part of this plan to force out of production some of the more inefficient and really dirty factories?

DALE: Yeah, that's been an actual policy across all industries in China for a number of years now.

SNOWDON: And with, let's say, a five to ten per cent cut in steel output in China, should Australia's energy and iron ore producers and exporters be worried?

DALE: This sort of thing will have some impact, I think you might see a short period of slippage in terms of tonnage. But it's not something we'd be overly concerned about. On the thermal coal side you should expect to see a little bit of weakness in thermal coal prices into the forth quarter, but again, [that is a] shorter term issue that we're not too concerned about.

SNOWDON: On the up side, some of the excess stocks of raw commodities and finished products will be cleared out of the system.

DALE: And you then actually see quite a good demand pull come through the system, so you see iron ore imports increase, thermal coal imports increase and you also see steel prices firm up and go up. So, profitability through the chain improves.

SNOWDON: The policy choices are not easy ones for China's leadership, which is working out the next five year plan.

It's development verses the environment, but China's official media are applauding the energy saving measures.

Coupled with an industry consolidation process, they say the worst companies will be closed for good, with better profits for the survivors.

They will need them - in another development Australia will be watching - after a six month trial run in one province, China will extend its resources tax nationally.