After a largely useless attempt in March to control over capacity in the Chinese steel industry, the authorities are now using a twin track approach to try and reign in steel production capacity which only the most radical super-cycle supporter could believe is justified.
First, no doubt with one eye on the current Copenhagen summit, the Ministry of Industry and Information Technology is reported in a Bloomberg article as laying down maximum consumption and emission standards for steel makers in an effort to force closure of less efficient and/or more polluting production capacity. Steel plants should cap blast furnaces energy consumption at 411 kgs (906 lbs) coal equivalent and fresh water use at 6 tons for each ton of steel they produce. Furthermore, steel plants should cap effluent discharge at 2 cubic meters (2 metric tons) and sulfur dioxide emission at 1.8 kgs (4lbs) for every ton of steel made. Banks should not give credit support and government departments must not issue iron ore import permits or supply the steel-making ingredient to mills failing to meet the new requirements, the Chinese ministry is reported as saying.
The second track is an effort to close smaller steel production plants and consolidate production among the larger mostly state owned enterprises. The proposal is for carbon steel mills to have a minimum production capacity of 1 million tons, and specialized steel makers such as stainless mills to have at least 500,000 tons. China is estimated to have between 300 and 400 carbon steel mills with individual capacity of less than 1 million tons.
Past attempts to control investments in the steel industry have come to nothing but reports suggest this time the government is keen to get to grips with the problem. China’s steel production could be 570 million tons this year but capacity is estimated to be up to 700 million tons or higher, the National Development and Reform Commission, the country’s top economic planner, said last week. Small mills may be easier to squeeze out of business but medium sized mills will prove more of a challenge. We have seen over the last year the steps regional governments are willing to go to support local employment. Steel mills and their support industries like coal are big employers in China and there will doubtless be much backtracking and manipulation at the regional level to closures. In the long run though, China has to get to grips with this situation and its encouraging to see they are having another go at it. Let’s hope for the health of steel mills in the west, the Chinese have more success this time around.