Environmental inspection - Coming again

The Ministry of Environmental Protection (MEP) has proposed measures in a draft policy document aimed at curbing the deteriorating air quality around key cities such as Beijing, Tianjin and the surrounding areas. The draft rule includes a total of 28 cities in Shandong, Henan, Shanxi and Hebei provinces.

Yesterday, it was announced that the first 2017 inspection will officially start 15^th February and last for one month. This could be an important litmus test of the new draft rules. If the inspection team implement the rules mentioned in the draft, we can see coal, alumina, aluminium and carbon industry will all have a major restriction. However, the extent of the impact is dependent on how strict the inspection is!

Since July last year, the first round inspection started in Henan Province. Almost all carbon producers were seriously affected or even shut down. In the following months, Shandong, Inner Mongolia, Hubei, Chongqing and Jiangsu all saw inspections and had some factories closed. It’s a good thing that the authorities are acting to improve the air pollution. The not-so-good outcome caused by the inspection is market disorder - supply shortages pushed mainstream price up hundreds of yuan. High price does not mean high profits or healthy market condition. Manufactures are frightened by endless inspection and endless policy requirements.

To make matters worse for producers and market participants, China’s annual “Liang Hui” - the annual week-long meeting of Parliament - will take place in March. It’s likely that some measures will be put in place to ensure blue skies during that week.

What we heard from carbon factories is they don’t know what the central and local governments will do in the new round of inspection. But producers really want to understand and accept if they indeed have the right levels of pollution treatment equipment. Most carbon plants were able to return to full production following last year’s inspections, except in Gongyi where they are still under limitation. The carbon plants cannot afford to spend capital on new equipment if the government is going to change the rules. They can’t afford the capital, and they can’t afford to be shut down again.

Hopefully, the inspection teams will bring clarity and consistency to the producers and therefore to the market. Meanwhile, it will be a substantial and effective way to improve air quality.