Cleaner, but not leaner:
China steel mills defy capacity cutbacks
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[October 22, 2016]
By Ruby Lian and Manolo Serapio Jr
SHANGHAI/SINGAPORE (Reuters) - Chinese
steel mills are becoming cleaner every month as Beijing pushes to curb
its smoke-stack industries. But they're not getting any leaner.
Despite efforts to step up environmental checks and trim out excess
capacity, steel output by the world's top producer has risen
year-on-year for the past seven months.
As emissions cuts will mean steel mills are better able to meet stricter
government standards, Beijing may find it more difficult to cut
overcapacity in a sprawling industry.
For now, domestic demand from infrastructure and construction has been
robust, absorbing most of the extra supply. But a steeper slowdown in
the world's second-largest economy could force mills to ramp up sales
abroad.
That could rekindle tensions with Europe and the United States, major
trading partners which have for years accused China of dumping its
excess steel overseas, hitting producers and hurting global prices.
The issue took center stage at a recent G20 summit in China when world
leaders pledged to work to address excess output.
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China's top steel producing city of Tangshan in Hebei province
illustrates Beijing's dilemma. Hosting a months-long international
horticultural show, Tangshan had a major six-month clean-up to ensure
blue skies for visiting dignitaries, including the country's president
Xi Jinping.
Industry experts predicted this would see a big drop in output in a
province that accounts for a fifth of national production, going some
way to realizing government goals on output and capacity cuts.
But production dipped by far less than expected as mills sustained
output even as they cleaned themselves up.
They could do this largely because steel prices <SRBcv1> have risen 40
percent this year, and strong domestic demand is expected to continue,
underpinning those increases, though exports have fallen to their lowest
since February.
By end-September, China had completed more than 80 percent of this
year's capacity reduction goals in coal and steel, said Huang Libin, an
official at the Ministry of Industry and Information Technology.
China has targeted a cut of 45 million tonnes from its surplus steel
capacity this year.
But the battle to tackle excess capacity and curb pollution has failed
to dent production. China's annual crude steel surplus is estimated at
around 300 million tonnes, three times the annual output of the world's
second-biggest producer, Japan.
"If steel mills are profitable, there's no reason for the government to
order them to reduce production if they meet environmental criteria,"
said Xia Junyan, investment manager at Hangzhou CIEC Trading Co in
Shanghai.
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![](../images/102216pics/busine83.jpg)
The sun sets behind a chimney of a steel mill in Tangshan, Hebei
province February 18, 2014. REUTERS/Petar Kujundzic/File Photo
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BATTLEGROUND IN TANGSHAN
While many of Tangshan's small mills have closed, bigger plants have installed
or upgraded equipment since a nationwide environmental crackdown began in 2014,
industry sources say.
Some were forced to cut sinter production - processing iron ore fines into lumps
- for a few days in September and October to clear the skies during the recent
horticultural show. But the city's about 150 blast furnaces only dropped output
three times - in June, July and September - and for only a couple of days during
the six-month clean-up, according to a survey by industry consultancy
Custeel.com.
The biggest drop was in early June when operating rates fell below 65 percent as
leaders from central and eastern Europe gathered in Tangshan for talks on
economic ties, followed by another fall in July as the city prepared to
commemorate a 1976 earthquake that killed at least 250,000 people.
Otherwise, mills have been operating at above 80 percent of capacity this year,
the Custeel.com survey showed.
"Production can be flexible. Even if production at steel mills is hit
temporarily by the environmental crackdown, they can increase production later
to offset the losses," said Xia at Hangzhou CIEC Trading.
The government looks ready to keep targeting Tangshan's mills in its war on
winter smog, with Hebei province last week imposing what it calls "special
emission restrictions" on local steel mills, according to a policy document.
Last month, the National Development and Reform Commission, China's state
planner, said it punished hundreds of steel and coal companies nationwide for
violating environmental and safety regulations. Some were forced to close or cut
output.
(For a graphic of China steel output and prices click
http://fingfx.thomsonreuters.com/gfx/rngs/CHINA-STEEL/0100304N0B5/index.html )
(Reporting by Ruby Lian in SHANGHAI and Manolo Serapio Jr. in SINGAPORE; Editing
by Josephine Mason and Ian Geoghegan)
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