China pulling back from an ambitious emissions target for domestic steel mills is expected to bolster their output, which bodes well for dry bulk shipping. Affected by stricter capacity-cutting rules and elevated coal prices, the country’s steel production dropped 16% year on year in the second half of 2021, completing the year with a contraction of 3% for the first time since 2015.

The unexpected slump has raised the vigilance of policymakers about its economic consequence and contributed to Beijing’s recent decision to grant steel makers five more years to peak their carbon emissions by 2030. The government still restricts mills from adding new capacity, but the move is expected to help avoid similar disruptions experienced last year. “[The extension] may provide mills with the opportunity to increase output going forward,” said shipbroker Braemar in a report.

China is revving up efforts to spur its slowing economy, which has been hit by a combination of factors, including the pandemic, the side effects of decarbonization measures and the crackdown on the property market. The expansion of China’s gross domestic product slowed to just 4% in the fourth quarter, while US investment bank Morgan Stanley has cut its forecast for the first quarter of 2022 to 4.5% from 4.9% previously predicted, citing the impact of the Omicron coronavirus variant on the country. Beijing needs to secure sufficient supply of raw materials, including steel, to back its economic stimulus policies, highlighted by the resurgence of infrastructure investment. “I’m not surprised at all that, when push comes to shove, the economy is more important than environmental considerations,” said Banchero Costa head of research Ralph Leszczynski. “As already happened many times over the past 20 years, an almost default reaction to slowing growth and rising unemployment is to boost government investment in infrastructure, and this of course leads to more steel demand.” However, the shaky conditions of domestic property developers and the deceleration in housing construction, the country’s largest steel consumer, remain a big concern, he added.

The central government has shown a gesture of goodwill, including easing rules on presales, subsidies, and mortgages, to stabilize the market, but its aim to deflate the housing bubble has not fundamentally changed. “The ‘houses for living not for speculation’ policy remains in place,” said Mysteel, the Shanghai-based steel industry consultancy. It forecasts steel consumption of the real estate market to decline 2.7% in 2022, although the shortfall can be offset by that of infrastructure, which is expected to grow between 5.1% and 7.6%. The former sector normally consumes twice the amount of steel compared to the latter.

Meanwhile, the pushback of the carbon peak deadline has also offered steel plants leeway to complete the costly green transition, said Li Qianwen, an analyst of Shanghai International Shipping Institute. That means the reliance of China’s steelmakers on iron ore imports, the dominant source of demand for large dry bulkers, will also be extended. Beijing is pushing for an expansion in capacity of electric arc furnace steelmaking or the hydrogen-based process to increase efficiency and trim emissions. The first approach uses steel scraps instead of iron ores as raw materials. The uptake has been slow, though, said Ms. Li. “Steelmaking companies seem lacking enthusiasm to switch the technology, partly for cost reasons. The transition will take time and that’s why the government is giving them more time.” She expected China’s iron ore imports to keep steady this year, although the downtrend in the long term is inevitable.