· Country unlikely to hit 14th five-year plan targets for carbon and energy intensities

· Impact of new fiscal stimuli on addressing property sector's downturn uncertain

· Low profitability hinders efforts by industries like steel to invest in decarbonization

China’s Two Sessions held no real surprises for the commodity markets and hinted that the country faced an uphill battle to meet some of the critical energy, industrial and climate targets set under its 14th five-year plan (2021-2025).

Chinese Premier Li Qiang delivered his work report on March 5 at the National People's Congress. The Congress and the Chinese People's Political Consultative Conference are jointly known as "Two Sessions,” the country’s biggest annual political gathering, which sets the stage for some of the most important economic and political decisions.

The year 2025 is particularly critical as it marks the deadline to meet the 14th five-year plan targets. Li Qiang emphasized that this year’s gross domestic product growth rate should be kept at around 5%, adding that the government will implement various measures to reverse the downturn and stabilize its property market. Li also committed to a 3% reduction in energy intensity this year.

However, it is uncertain to what extent the new fiscal stimuli, such as the trillions of government bonds, will flow to conventional industries such as steel and refining. Their profitability remains low, and their investments in decarbonization are facing difficulties.

Meanwhile, a 3% reduction in energy intensity signaled that the country is unlikely to meet its energy and carbon intensity five-year plan targets, putting the world’s largest greenhouse gas emitter in the spotlight again for slow decarbonization despite rapid renewable expansion.

Infrastructure

· Steel: The downturn in China's property sector has led to limited growth of ferrous scrap output and a notable fall in domestic steel demand, restricting scrap consumption and the development of electric arc furnaces. Meanwhile, falling domestic steel demand, coupled with overcapacity, has weakened the profitability of steel mills and diminished their ability and willingness to improve energy efficiency.

· Oil: China’s electric vehicle boom led to demand for transportation fuels peaking earlier than expected. Meanwhile, the economy’s key drivers have shifted to service and technology amid a long-drawn property market crisis, further capping petroleum consumption. The refining industry has speeded up its consolidation, with the phasing out of old and small capacities to improve overall efficiency, and new mega-refineries gradually starting operation.

· Natural gas: China is unlikely to meet the natural gas storage capacity target due to high investment and operational costs, a lack of profitable business models and technical barriers.

· Renewable: China needs to continue expanding its cross-provincial power transmission networks and utility-scale energy storage capacities to accommodate the rapidly expanding solar and wind generation capacities and make the final push for meeting the elusive carbon intensity target.

· Aluminum: Although China’s aluminum production capacity has already approached the government-set ceiling of 45 million mt/year, its production volume is expected to continue growing slowly in the years ahead, driven by solid demand signals from its clean energy sectors, such as electric vehicles and photovoltaic products.

· Lithium: China’s new energy vehicle sales will continue growing in 2025, with the penetration rate expected to reach over 50% this year. This will support the demand for lithium. However, oversupply will continue to pressure China’s lithium salts market.

Trade Flows

· Steel: Due to shrinking demand and almost no increase in scrap supply, the capacity utilization rate of EAFs in China dropped from about 51% in 2023 to 46% in 2024. This market reality has also increased the challenge of investing more in EAFs.

· Oil: China's crude oil production rose 1.5% year over year to 4.26 million b/d in 2024, the third year to exceed the annual target of 200 million mt (4.02 million b/d). Meanwhile, crude imports fell 2.1% year over year to 11.08 million b/d, official data showed. Hence, China has managed to slightly reduce its dependency on imported crudes to 72.2% in 2024 from 73.6% in 2020.

· Natural gas: China’s domestic natural gas production is on track to meet the five-year plan target. The key drivers for production growth are reducing dependency on imports and providing buffer power supplies to address renewables' intermittency.

· Carbon: Since 2025, China’s compliance carbon market has expanded to the steel, cement and aluminum sectors to encourage them to cut capacities, save energy and reduce emissions. However, carbon policies remain loose and are unlikely to catch up with the energy intensity and carbon intensity targets.

· Aluminum: Despite the domestic push for clean energy, US-China trade friction may slow aluminum demand growth and impede trade flows. China’s cancellation of the export rebate and the US hike in import tariffs on Chinese goods might affect the export market in 2025.

Prices

· Steel: China’s steel market will continue to be pressured in 2025, given shrinking domestic steel demand and the escalation of US tariffs against China. Platts, part of S&P Global Commodity Insights, assessed Chinese domestic rebar and hot-rolled coil prices, proxies for long and flat steel markets, at Yuan 3,250/mt ($447/mt) and Yuan 3,400/mt, respectively, on March 4, down by 13.6% and 12.8% from a year earlier.

· Oil: “Studying and improving the pricing mechanism for refined oil products” was a target under the 14th five-year plan, but a source close to regulators said a further adjustment of the pricing mechanism is unlikely in 2025. The source added that the current mechanism has effectively avoided volatility and controlled inflation, and the study on a better mechanism is ongoing.

· Renewable energy: China recently launched a new renewable price settlement mechanism, similar to the contract-for-difference mechanism in European markets, aimed at stimulating renewable energy consumption and cutting carbon intensity.

· Carbon: Currently, China’s compliance carbon price is $12-$13/mtCO2e. Despite the pressure of meeting five-year plan targets, the compliance price is expected to remain at this level in 2025, considering the financial difficulties faced by companies in the newly onboarded sectors.

· Lithium: In China’s lithium salts market, the growth of downstream demand is expected to fall behind that of supply from domestic smelters and imports in 2025. On March 3, Platts assessed China’s battery-grade lithium carbonate at Yuan 74,000/mt on a delivered-duty-paid basis, down 33.6% from a year earlier.

Note: The Chinese government announced a plan in 2023 to adjust the calculation method of energy intensity, excluding raw material and non-fossil energy consumption. Such an adjustment could translate into a 10.8% reduction in energy intensity in 2021-2024, S&P Global Commodity Insights estimated.