ESG Focus: Carbon Markets To Reduce Chinese Iron Ore Demand

ESG Focus | Dec 08 2021

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ESG Focus: Carbon markets to hit China iron-ore trade

China’s green taxonomy homes in on circularity, suggesting a -28% fall in seaborne iron-ore demand within five years – not to mention metallurgical coal.

-Carbon-market agreements to hit Oz miners
-Higher carbon prices and the CBAM connection
-The China, CBAM and Australia connection

By Sarah Mills

COP26’s carbon-market agreements could hit Australian miners within the next five years, say analysts.

The world’s nations reached an agreement on a framework for carbon markets under Article 6 of the Paris Agreement, which analysts expect will free transition capital and raise carbon prices.

 “Global agreement on carbon mechanisms will unleash market forces, but also increase transition risk,” says Credit Suisse in its recent COP26 Watch.

While article 6 does not have direct implications for voluntary carbon markets, the internationally transferred mitigation outcomes (ITMOs) and the new market-based mechanisms are likely to reduce the pool of available offsets in the voluntary market, pressuring prices (see Article 6 summary below).

The EU and US also agreed to a deal to abolish tariffs and restrict access to products that don’t meet carbon intensity levels.

Higher carbon prices and the CBAM connection

Observers consider one of the main achievements of COP to be the decision to price carbon high enough to incentivise a green transition.

“Agreement on the rule book should see strong growth in the coverage of emissions trading schemes and the voluntary market: in our view, the foundations of a global carbon price have been put in place,” says Credit Suisse in its COP26 Watch.

Credit Suisse expects this will result in sharply higher carbon price and transition risk and estimates the resulting average Carbon Earnings at Risk (CEAR) for miners will increase from 14% to 102%.

Macquarie agrees, expecting prices in voluntary carbon credits will be “on fire”, and notes European carbon prices hit new highs in late November.

Bloomberg Green reports Europe's carbon price almost tripled in 2021, and the cost of permits has risen more than 140% this year - a move that favours gas over coal.

Clean Energy Transition expects permits will continue to rally strongly over the next few weeks as utilities buy allowances for the year's emissions burning.

The EU’s Emissions Trading System is pricing carbon at EUR60 in preparation for the introduction of the carbon border adjustment mechanism (CBAM), which is expected to have a significant impact on Australia’s resource companies over the next five years, particularly upon iron ore and metallurgical coal exporters.

The CBAM applies to steel, aluminium, ammonia, cement and electricity.

CBAM developments may indirectly hit Oz miners

Analysts say that on a direct basis, the affect of CBAM will not be too bad on Australian iron ore and metallurgical coal exporters, but if the EU extends the tax to upstream products, the risk for Australia will be significant.

They say China is the big directive and that CBAM’s effect on Chinese exports is likely to significantly decrease iron ore and met-coal demand within the next five years. 

China’s recently published green taxonomy focuses strongly on circularity, as the manufacturing giant moves to kill two birds with one stone.

“On current projections, within five years time, China’s products will be 10% less competitive and, as the largest importer to the EU, it recognises the threat and is moving very fast,” says one analyst.

“Already, China is massively accelerating its arc furnace development. This is likely to result in a 28% fall in seaborne iron ore demand. Basically there will be less metallurgical coal and less iron ore.”

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