Even though China's 14th five-year plan did not outline a more aggressive target to cut carbon emissions, the country has recently implemented tougher measures to reduce greenhouse gas emissions from its top coal-consuming sectors to show its commitment to achieving carbon neutrality by 2060.

Last month, the government cracked down on emissions in Tangshan, the country's top steel producing hub, in Hebei province in a bid to address air pollution in the city. A total of 23 steel mills were ordered to cut their emissions by more than 30% by year-end after an inspection led by Environment Minister Huang Runqiu found that some plants were running at high capacity despite the emergency anti-smog measures in place, while some faked their production records.

Shougang Qian'an Iron & Steel and Shougang Jingtang Iron and Steel Co. Ltd., which completed facility upgrades to meet ultralow emission standards in 2020, were exempted from the curtailments.

Meanwhile, aluminum smelters in Inner Mongolia, a major producing region, are facing production cuts due to the sector's heavy reliance on captive coal-fired power supply. Capacity expansion in aluminum smelting and alumina refining will not be approved in the region starting this year after being singled out by China's state planner last month for failing to meet its 2019 energy consumption and efficiency targets.

According to data from International Aluminium Institute, China's aluminum industry used 426.7 TWh of coal-generated electricity in 2019.

While China is still preparing an action plan to peak its emissions by 2030, analysts see more capacity and production constraints on the horizon for energy-intensive steel and aluminum sectors in other regions.

"You can't rule out the possibility that the local authorities in other regions with carbon-intensive industries will follow suit to scale up the restrictions on energy consumption and greenhouse gas emissions," ING Bank's senior commodities strategist Yao Wenyu said.

Refinitiv's lead carbon analyst Qin Yan said in an interview that it would not be surprising if stricter measures are introduced in major coal-producing regions such as Shanxi, Shaanxi and Shandong. Qin added that steel production may be curtailed in other regions as China's industry regulator, the Ministry of Industry and Information Technology, remains "firmly committed" to reducing steel output in 2021 to meet the country's carbon emission targets.

The Chinese steel industry is working on a plan to peak its emissions by 2025 and reduce them by 30% through 2030, according to the China Metallurgical Industry Planning and Research Institute.

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Prices of steel and aluminum in China rallied last month, pushing futures in Shanghai to multiyear highs. S&P Global Platts said in a March 30 report that China's steel mill margins have reached their highest level since December 2020.

Qiu Yuecheng, director of coal, steel and mineral coke research at Everbright Futures, said the rally in steel futures is expected to continue amid strong domestic and overseas demand and an expected lower production driven by China's green transition.

However, Qiu noted that China is reportedly considering making adjustments to its export rebates and import taxes for the steel industry. Any significant changes will have an impact on trade flows of China’s steel products, and will subsequently affect the domestic steel market, Qiu said.

Even if the aluminum sector has yet to outline a clear roadmap to slash emissions, there is an ongoing capacity relocation from coal-intensive provinces such as Shandong to renewables-rich regions in the southwest including Yunnan and Sichuan, where electricity prices are lower, according to Refinitiv’s Qin.

Yang Muyi, a senior analyst at London-based energy and climate research group Ember, noted top aluminum producers Aluminum Corp. of China Ltd. and Shandong Weiqiao Pioneering Group Co.Ltd. have started planning their long-term strategies to achieve carbon peak and neutrality.

Unlike steel, aluminum may have a larger role to play in China’s transition to a lower-emission economy given its use in the photovoltaic industry and new energy vehicle industry. Yang said the demand for aluminum is increasing rapidly from the green transition, while demand from construction and conventional vehicle industries will likely decline in the long term amid China's push for a healthy property market and further electrification of transportation sectors.

ING Bank’s Yao said the aluminum market is likely to see both increasing demand and supply constraints, bringing the global aluminum market to a structural deficit in the medium to long term. Yao previously forecast a growth of 7% in China's primary aluminum production this year on top of a record production of 37.08 million tonnes in 2020, but the strategist now expects an increase in downside risks to production growth amid further pressures on aluminum operations in regions that rely on coal-fired electricity.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.