China’s coming industrial transformation and the threat to Australia’s economy

China is the world’s largest fossil fuel consumer and expects to keep growing consumption until 2030 but be net zero by 2060.  Many Western politicians and political commentators consider these ambitions to be fanciful. However, there are several reasons to suggest that in fact China will exceed these targets and in doing so pose a major threat to Australia’s exports and living standards.

China mines, refines, and transports about four billion tonnes of coal, one billion tonnes of steel, 2.4 billion tonnes of cement, and thirty-two million tonnes of Aluminium. Below we will show that all these volumes and the associated emissions will fall dramatically as the country’s economy matures. Further, given Australia’s aggressive rhetoric, this will give China an opportunity to diversify remaining demand away from Australia.

Some forecasters suggest that China will install 90 GW of solar and 40 GW of wind this year. As it installed an average of 60GW of wind and 55GW of solar per year in the last two years these are not fanciful numbers. It is also adding geothermal, hydro, solar thermal and biomass/waste to energy. Overall renewable output will increase by an annualised 300~350 TWh/y.

For comparison Australia’s total electricity consumption from all sources will be about 230 TWh and Germany uses about 475 TWh/y. If China continues at that rate for 10 years renewables will be supplying 4,000~4,500 TWh/y roughly the same as the current US electricity production.

In addition, China is expecting to build 150 new nuclear power plants. Assuming only forty are built by 2030 at 10 TWh/y each that is another four hundred TWh/y in addition to four hundred TWh/y from existing nuclear.

In summary by 2030 China could be producing 5,000~5,500 TWh per year from zero carbon sources.

Now many assume that China’s continuing economic growth will require rapid growth in energy consumption but that is not certain. While China will remain an industrialised country, most of its growth will come from services like any other advanced economy. Industry is already declining as a share of GDP from 46% in 2010 to 38% in 2020. and may well start to decline in absolute terms as China becomes less cost competitive because incomes are rising and a declining workforce which has been shrinking since 2015.

The demographic trap means that China’s growth will slow. If China’s economic growth continues at an unlikely compound 5% until 2030, it should reach a nominal US$35trn at Purchasing Power Parity. In Europe presently, economic output requires about 145 kWh/$1,000 of GDP, the US about 200 kWh, but everywhere that number is falling. China uses 350 kWh.

If it still needs 280 kWh/$1,000 GDP in 2030, then its expected electricity demand would less than 10,000 TWh, about 20% more than today’s figures. Even adding eighty million EVs is less than 150 TWh. That much generation would be 6.8 MWh per person more than Europe today at 6 MWh, even though GDP/person in China will still be less than half current European levels.

The growth in renewables and nuclear outlined above will mean that coal and gas power generation will fall from about 5,800 TWh/y to 3,300~4,000 TWh. To cap things off there is displacement of coal in heating and industrial processes. China currently uses 200~300m tonnes of coal for low grade heating. which will be displaced by more efficient buildings, gas, and electric heating. These changes will be accelerated by the recent rise in coal prices and increasing community demands for clean air.

This will mean that Chinese coal mines will have somewhere between 500 and 1,000 m tonnes of spare capacity. The implication for Australia is that there will be much more competition in the thermal coal market. The reduction in coal power in China coupled with aggressive targets for renewables in Vietnam, India, Korea, and Japan could see an 800-million-ton reduction in annual Asian thermal coal demand and China becoming a net exporter. Total Asian seaborne trade is only 800m tonnes so with continuing competition from Indonesia, Russia, South Africa and possibly China, Australia could see thermal coal exports fall by 50~80%

Then we need to consider steel. Western Europe currently uses about 180m tonnes of steel or 355 kg per person, the US is less than 250 kg. By 2030, China is expected to have a slightly smaller population than now and even if steel consumption remains at 500 kg/person, which will see steel production fall by 350 million tonnes per year. At the same time as the economy matures, EAF production from scrap will probably rise from 10% to around 1/3rd of production. That is still below the European share and well below current US share.

One steel consuming industry where Chinese exports may increase is motor vehicles, but even if it is exporting 20m vehicles per year that is only about 22m tonnes of steel, vs current production of 1,000 m tonnes. Thus, raw steel may fall from about 900m tonnes to perhaps 400~450m tonnes, hence coking coal demand would fall from about 700 m tonnes to 280~330 m tonnes. China currently mines almost 490 million tonnes.

Last year China imported less than 10% of coking coal requirements, so a 60% reduction in demand may see it become a net exporter. Even if it only takes 10% of Australia’s other markets that is a 30% reduction in total Australian coking coal exports. If China gains market share in shipbuilding, railway equipment and automobiles from Japan and Korea then the fall in demand from those customers will compound our losses

It is also quite possible that by then 20% of raw steel produced domestically will use various low carbon processes and/or China will start to import green iron, thus exporting the pollution associated with the blast furnace process. China produces about 350m tonnes of its own iron ore and is planning to expand output by 30%. If those goals were achieved and raw steel production falls it would mean that imports would fall from 1.2 bn tonnes to 350m tonnes. It is also trying to increase import capacity from Brazil and Africa to around 500m tonnes per year which would technically allow it to eliminate all 700m tonnes of Australian iron ore

Then there is cement production. The EU and UK produce about 185m tonnes of cement, 365 kg/person, in the US per capita use is similar. Japan is around 450kg and Korea about 1,000 kg, but China uses about 1,700 kg per person. Given that by about 2026 China will have the most modern infrastructure in the world, it is hard to believe that by 2030, its consumption per person would be higher than present day Korea. Hence cement production can be expected to fall by about one billion tonnes, and a corresponding fall of 300m tonnes of world coal demand.

Similarly, China’s cost advantage in aluminium production is rapidly declining. Even if China can maintain its coal price goal of Y700~900/tonne, less than half the price in October 2021, that still means a long-term power price just under US$70/MWh. Brazil, Canada, Australia, Russia, Norway, the Emirates can all achieve rates as little as half that with renewables backed up by hydro/gas.

China’s share of aluminium production is likely to fall and even if it remains four times as high per person as the US, which is a 1/third reduction in output. Currently about 70% of aluminium energy consumption is from fossil fuels, the combination of increasing renewable and nuclear output and declining aluminium output could see consumption of coal power in the aluminium industry fall from round four hundred TWh/y to less than two hundred TWh.

While there is a worldwide shortage of natural gas and China is currently buying record quantities from Australia, there is no certainty that that will continue beyond the medium term. China has recently opened a new pipeline to Russia which is currently running at somewhere above five billion cubic metres of gas per year. Its target capacity is 38 BCM. The increase in capacity is equal to half Australia’s total gas exports to China.

Further there are talks underway to build to build Power of Siberia 2 which would move eighty bn cubic meters per year. Russia will probably lose more than half its 200 BCM exports to Europe, so it should have enough capacity to completely displace Australian exports to China if the current trade war between Australia and China continues.

Russia is already the world’s largest wheat exporter even though it has 200m hectares of abandoned farmland. If the new sanction regime means it cannot export energy to the West, it will be very difficult to stop it exporting food to the East and Africa, so while Australia’s farmers are currently experiencing very high prices there is no guarantee that these prices or volumes will last.

In summary, if relations remain as they are, China could eliminate coal, gas and iron ore imports and Russia could displace a significant quantity of food exports from Australia by 2030. That would probably result in a fall in iron ore prices to around US$60/tonne and coking coal, gas and grain prices to fall significantly.

The combined loss of volume and lower prices could see iron ore and energy exports fall from around $350 bn this financial year to around $100bn by 2030. That loss is four times the defence budget or more than the entire social security budget. Unless we develop alternatives quickly, it is equivalent to a 10% fall in national income per person. Are we up to the challenge?