More ‘zombie steel mills’ no solution for Chinese smog

Looking to quell public anger over the toxic air, officials say they are acting by closing steel mills and limiting output in Hebei Province, but experts say scapegoating the sinking sector will not clear the air

By David Stanway  /  Reuters, TANGSHAN, China

Sun, Mar 02, 2014 - Page 14

Reforming the bloated steel sector in northern China’s Hebei Province is a key part of Beijing’s efforts to cut air pollution, but it is the market — not the government — that is doing most of the work.

That undermines state media claims that the Chinese government is going the extra mile to clean up Hebei, the country’s biggest steel producer and home to seven of its 10 most polluted cities, environmentalists and industry experts say.

Stirred by growing public anger over smog that often spreads to neighboring Beijing, the central government summoned Hebei’s leaders to a series of meetings in the capital last year during which it urged them to draw up plans to slash steel capacity. They eventually agreed on a target of 86 million tonnes, or about 35 percent of current capacity, by 2020.

With heavy smog again engulfing much of northern China since last week, Beijing has sent inspection teams to Hebei and elsewhere to see how authorities are responding, and the steel sector is high on their list of targets.

Yet many mills are already near bankruptcy because of slowing demand, plunging steel prices and a liquidity crisis that would have forced them to shut anyway, experts say.

“They are only closing steel mills that are already dead,” said Xu Zhongbo (許中波), chief executive of Beijing Metal Consulting Ltd (北京梅塔科咨詢公司) and a veteran industry adviser who works with steel firms in Hebei.

On the outskirts of Tangshan — a city of 7 million people that makes more steel per year than the whole of the US — the hulking cranes and chimneys at the Tanghsan Qingquan Steel Group (唐山市清泉鋼鐵集團) mill are frozen in inactivity. After not being paid for six months, the mill’s workers went on strike in October last year and have not returned since.

Qingquan Steel is one of dozens of so-called “zombie mills” in Tangshan, where authorities have been ordered by the Hebei Provincial Government to draw up a list of plants to close so output can be cut by 10.8 million tonnes this year.

“In Tangshan and other parts of Hebei, the private mills are facing the most difficult time in their history,” Xu said. “Profits are poor and producers are all losing money — this has nothing to do with environmental measures: It is the economy.”

Tangshan’s steel sector has long been dominated by hundreds of small private producers taking advantage of vast local iron ore and coal deposits, as well as a building boom spurred by an earthquake that flattened most of the city in 1976.

Although Hebei once accounted for about one-quarter of China’s steel output, production fell to less than 20 percent in the final two months of last year.

Huang Wei (黃維), a campaigner with environmental group Greenpeace in Beijing who has studied the impact of Hebei’s industries on air quality, said that targeting steel mills was the easy option, given the difficulties already facing the sector as China’s economy grows at a more moderate pace.

The bigger challenge was easing Hebei’s dependence on coal, she said.

“Whether this target is too soft or not will depend on whether the reduction is an outcome of the market or purely a political task,” Huang said. “[The central government] will face an even tougher situation after it has picked low-hanging fruit like the steel industry.”

Officials from Hebei and Tangshan declined requests to be interviewed, while the Chinese Ministry of Environmental Protection in Beijing also did not respond to requests for comment.

State media has said that anti-pollution measures are behind the steel mill closures in Hebei, while local government announcements also suggest that it is an entirely environmental matter when they say they are determined to shut mills and other industrial facilities.

Hebei’s 250 million tonne annual production capacity was built on the back of cheap credit, soaring demand for low-quality construction materials and the willingness of growth-obsessed local officials to turn a blind eye to costly pollution controls.

The Hebei Provincial Government’s immediate target is to cut steel capacity by as much as 15 million tonnes this year. Hebei Governor Zhang Qingwei (張慶偉) vowed last month to fire any official responsible for even 1 tonne of extra capacity on their patch this year.

“It is very good for the local government, because they can avoid political trouble and meet their targets,” Xu said, referring to the work already being done by market forces.

Nevertheless, there has been some resistance to the measures.

An industry source said that Tangshan had delayed an order to shut down 3 million tonnes of outdated steel production capacity at Tangshan Guofeng Iron and Steel Co Ltd (唐山國豐鋼鐵有限公司) — one of the city’s biggest producers — until next year because it was one of the few firms there which made a profit last year.

While the Qingquan plant was reprimanded last year by local authorities no longer allowed to overlook environmental violations, orders to install costly new pollution controls would have made little difference to a facility with no access to funds and already incapable of paying its employees.

Dozens of plants in Tangshan’s steel hub of Fengnan District have closed, while some are still hoping to get bank loans and others are looking to receive compensation from the local government, although there is no more cash available to bail them out, experts have said.

“There are many others that have closed even though they haven’t declared bankruptcy. They aren’t formally shut because of the financial implications — they might be in debt and the banks would close in,” a senior iron ore trader based in Tangshan said. “We expect to see more closures this year.”