China struggles to control its steel production

While pollution approached a “very unsanitary” level in Beijing, the Chinese Minister of the Environment paid a surprise visit to the heart of the country’s steel industry.

When Huang Runqiu arrived in the industrial city of Tangshan, about 150 km east of the Chinese capital, he scolded four steel plants for what he considered “false” production records to avoid the targets. emissions.

The unusual intervention last month signaled the increasing power from the Chinese Ministry of the Environment following new commitments to reduce carbon emissions and increased efforts to control one of its most polluting sectors.

But the battle to control steel production also reflects how the government’s response to the coronavirus pandemic has undermined its plans to wean its economy off heavy industry and shift it to less carbon-intensive sources of growth. .

As many aspects of the Chinese economy, steel production has accelerated sharply as part of a supply-side boom that, over the past 12 months, has helped counter the initial effects of the crisis. This has contributed to the increase in the country’s carbon emissions compared to 2019, unlike other large economies, according to data from the International Energy Agency.

“The coronavirus crisis just made things more pronounced,” said Lauri Myllyvirta, analyst at the Center for Energy and Clean Air Research.

“You had a sharp drop in consumption and household services. . . and the government has responded to that by pushing for construction even more. It really meant an even bigger setback in their efforts to change the economic structure. ”

Chinese Environment Ministry steps up efforts to reduce carbon emissions © Greg Baker / AFP via Getty

In 2020, steel production in China rose 6% to 1.1 billion tonnes, its all-time high, while construction activity also jumped. Production also increased in 2019, when the government encouraged more infrastructure spending as growth slowed.

In Tangshan, the city government in March ordered most factories to cut production by 30 percent until the end of the year and seven steelmakers to keep production at half full capacity until the end of the year. ‘in July.

This month, he introduced rules forcing companies to renovate or stop using older, more polluting blast furnaces, and set a June deadline to demonstrate reduced cuts or face fines. . To underscore the message, the environment office distributed 1.92 billion rmb ($ 293 million) in fines to 48 local businesses in three days.

Zhang Gujiang, head of Tangshan’s party, told steelworkers that meeting environmental goals is a matter of survival. “There will be no way out for companies that do not completely address their environmental problems,” he said, according to state media.

One person working in the industry said that so few people can predict the exact direction of policy, everyone is afraid of further action.

Despite fines and warnings, reducing steel capacity can be difficult, especially when older, inactive units are replaced with new, more efficient technology.

“There has been a lot of investment in this industry and certainly a lot of it has meant more ability to come online in the big steel producers,” Myllyvirta said. “There is always a problem with the small unregulated players who are just outside the capacity control system.”

Tangshan Steel Plant, China

Tangshan Steel Mills have been criticized for faking production records in order to avoid emissions targets © Xiaolu Chu / Getty

While the supply of steel is difficult to control, China faces a comparable challenge on the demand side. Paul Bartholomew, senior metals analyst at S&P Global Platts, suggested that one of the reasons for high steel production last year was a “huge easing of credit conditions”, which the government is reversing. .

It also fueled a construction frenzy, boosting demand for metal and increasing the attractiveness of larger profits to producers.

“It’s a big challenge, because as soon as you start cutting back on production you just see the prices skyrocket,” he said. “In China, when people are making money, it’s hard to get things under control.”

The benchmark price of steel in China fell to Rmb5,550 last week from less than Rmb5,000 a month earlier, underlining the challenge posed by market forces to the government’s ambitions.

This tension is also at play in the real estate market. The government is trying to reduce the indebtedness of its largest real estate developers, and its measures – which include restrictions on global bank lending to the sector – could reduce demand for steel, about a third of which is for building construction.

But few expect demand to drop significantly. S&P Global Platts estimates that demand for steel in the real estate industry reached 322 million tonnes last year and expects demand to be between 313 and 328 million tonnes this year.

Myllyvirta pointed out that many construction projects are financed by “centrally controlled” banks, which means that any solution to steel production should be coordinated within the wider financial system.

“As soon as the central government says we’re not going to buy into all this construction anymore, and we’re ready to accept that it means a brief slowdown in GDP growth,” he said. “Then, this incentive to bypass controls. . . and try all the tricks in the book to produce more steel just won’t be there.

Additional reporting by Wang Xueqiao in Shanghai

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