In December 2023, the Chinese government announced new control measures to improve air quality across the country. These actions have already started to destabilize supply chains that rely on suppliers from China.
China decreased alumina output by 2.1% in December compared to November due to heightened pollution curb policies. Several iron ore mines in the northeast region suspended production amid polluting weather. There is particular concern during the winter, as manufacturers have been ordered to reduce output or suspend production in response to periods of poor air quality.
Ongoing government efforts to address poor air quality
China has been trying to reduce air pollution for a decade. In 2013, the State Council introduced the National Air Quality Action Plan to reduce particulate matter (PM) pollution by at least 10% by 2017. Another advisory was announced in 2018 to further curb air pollution. Through efforts like this, China managed to cut the average concentration of PM2.5 by 57% from 2013 to 2022, falling out of the ten most polluted countries in 2020 after being on the list from 1998 to 2019.
Measures have included reducing the number of cars on the road, tapering power produced by coal-fired power plants, and reducing throughput in a few heavy-emitting industries such as iron and steel manufacturing. However, pollution rebounded in 2022 as the country sought to boost economic growth disrupted by stringent policies during the COVID-19 pandemic.
As authorities tighten measures to curb pollution again, those doing business with companies based in China should prepare for sudden operational disruptions at local suppliers over the coming months.
New measures to curb air pollution pose risk to supply chains
Two action plans were announced by China’s central government in December 2023, encompassing various areas of the country during different periods. The first plan focuses on 57 cities in the Beijing-Tianjin-Hebei areas and runs from October 1, 2023, to March 31, 2024. The second plan extends this to 88 cities and includes the Fenwei Plain. This plan runs through 2025.
Several industries within these targeted regions will be vulnerable to disruptions during these periods. There is no straightforward way to achieve PM reduction since there are many sources that touch on nearly every sector of the economy.
A large portion of PM emissions originate from agriculture, industry, energy, residential, and transportation. Since its first introduction in 2013, China’s plan to control air pollution has included focus areas that can disrupt supply chains directly and indirectly:
- Replacing coal with cleaner fuels
- Shifts and mitigation measures in heavy-emitting industries, including substituting raw materials containing high volumes of volatile organic compounds (VOCs)
- Transportation sector reformations
- Emergency responses to high PM levels
The impact of each of these actions on supply chains can be significant. Manufacturing costs are expected to rise steadily along with power prices as China plans to substitute half of coal consumption with non-fossil fuels by 2025.
Heavy-emitting industries like iron and steel production will see a gradual shift as China bans capacity expansion in those sectors and will now require stringent environmental reviews for high-emitting projects. New growth in these industries will be more expensive as the new rules specify that emission controls will now be required in more cases. Logistical changes in the coming years are also to be expected as China requires more goods to be transported via lower-emitting rail and waterways as opposed to trucking.
In the short-term, the most important area to monitor for supply chain vulnerabilities will be the emergency response scheme for air pollution in winter times. Provincial and city governments can launch emergency responses and announce air pollution warnings at different levels based on the forecast PM concentration and expected duration of the pollution. These warnings tend to be issued only for imminent air pollution and typically without definite timelines. Authorities only lift emergency responses when PM levels drop to certain numbers again.
What to expect from air pollution emergency responses
The existing emergency response scheme comprises a three-tiered alert system. When emergency responses are activated, companies in different industries with different emission grades will have to adjust their production activities to control air pollution. The extent of adjustments is linked to the level of the emergency response, the industry, and the emission grade of the company which correlates with its process flows, capacity, transportation channels, the type of fuels consumed, and its raw materials. It ranges from voluntarily reducing emissions for companies to the mandatory suspension of production and transportation activities. The risk of disruptions grows with the severity of the air pollution alert, and the emission volume of the company. The system applies to 39 industries including automotive, iron, steel, and metal processing, general machinery, and petrochemicals.
However, companies may fail to comply with these regulations to avoid disruptions to production. A few examples have been reported in recent weeks, and those companies were subject to controls by local authorities since mid-November and subsequently called out for not adhering to local air pollution reduction measures. Stringent investigations carried out by the local or central government could lead to litigation issues targeting firms failing to follow the action plan.
PM pollution is notably worse in the colder winter months when volatile materials are more likely to condense to form additional particle mass. Emergency pollution control actions tend to be especially disruptive during the coldest months of the year and will likely ease as temperatures warm. Between October 25, 2023, and January 15, 2024, Everstream Analytics has recorded at least 60 emergency responses to air pollution across China.
Everstream clients are receiving more detailed insights and recommendations about this risk.
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