When Mao Zedong (毛澤東) ordered communities across China in the late 1950s to set up backyard kilns and rapidly increase steel production as part of his Great Leap Forward, the results were disastrous. The country turned out millions of tonnes of useless substandard steel, while millions of people starved as distracted farmers neglected their fields.
Now, China is taking another great leap: A vast binge of industrial investment, especially in the last two years, with steel once again in the vanguard. China has doubled its steel output since 2000, emerging as the world's largest producer by a wide margin, and is on its way to nearly doubling it again in the next three years. The pace of spending on new steel mills tripled from 2002 to last year.
Concerns are growing from Beijing to Pittsburgh about this breathtaking ramp-up of Chinese steelmaking, but not because anyone thinks the 1950s disaster will be repeated. Instead, executives and industry analysts are worried that the world will be stuck with an enormous glut of steel that could wreck profits and touch off mass layoffs at steel mills around the world, including those in the US.
PHOTO: AFP
Worries about steel have occupied the top leadership of China's government this week. On Tuesday, the State Council, China's Cabinet, announced that investors in new steel mills would have to put up at least 40 percent of the cost themselves before taking out construction loans, nearly twice the previous minimum of 25 percent. On Wednesday, Prime Minister Wen Jiabao (
Critics say the project was pushed through by local officials with disregard for land-use laws. The People's Daily and other state-controlled news media denounced the project on Thursday morning; the official New China News Agency announced later in the day that eight officials in Changzhou had been disciplined and that work on the new mill had been halted.
Together with new lending restrictions, the suspension of the Changzhou mill project sent a shiver through commodity markets and Asian stock markets, because Chinese demand is increasingly important to economies around the region and commodities producers around the world.
For the moment, domestic demand for steel in China is high, as economic growth roars ahead at 9 percent or more a year. China now consumes twice as much steel as the US, though its economy is still only one-eighth the size. But more than half of that steel is used in construction, often in the kinds of speculative projects that Beijing has been trying to rein in.
If China's growth slows -- something the Chinese central bank has been trying to make happen in response to rising inflation -- then much of that metal may flood out of the country in search of export markets.
"My prediction is, frankly, we're going to be swimming in steel in the next year to 18 months," said Jack Perkowski, the chairman and chief executive of Asimco Technologies, a big Beijing-based auto parts company that buys a lot of steel.
If demand in China fell back to where it was in 2000, enough surplus Chinese steel would be freed to meet nearly one-fifth of the rest of the world's demand; it would almost equal the total amount of steel now traded internationally.
In recent months the Chinese government has been trying to discourage the start of work on any more steel mills, in part because there are already acute shortages of electricity and iron ore across much of the country. But it has been unable to dissuade provincial governments from proceeding with many projects already under way, nor from leaning on the local branches of national banks to lend money for them.
"Overheated investment in steel is no accident," The Economic Daily, an official publication, warned this month. "It's just a prominent example of reckless investment and low-quality development in some industries and regions."
The history, the problems and the potential of China's steel industry can best be seen at one of the country's largest and most famous steel mills, the Nanjing No.1 Steel Works, and through the experiences of its general manager, Yang Si Ming. The mill faces electricity shortages and a likely domestic glut of steel in the coming years, and is already preparing to step up exports, first to Japan and South Korea, and eventually to the US.
The 10,000-employee mill dates from 1958, the height of the Great Leap Forward. But it is no backyard kiln; indeed, it was built to be a showcase of communism.
Situated on the outskirts of Nanjing, a former capital of China, the mill is a Dickensian place where green and orange flames leap as red-hot slabs of steel roll slowly along conveyor belts through a long, tall shed, where they are pounded into shape and sprayed with jets of water to smooth their finish.
Though some of the buildings are nearly half a century old, the plant was and remains one of China's more sensibly planned steel mills, with its own small mine nearby for low-grade iron ore and its own dock on the Yangtze River for bringing in high-grade iron ore by barge and for shipping out finished steel.
Frontage on the seacoast or a navigable river is crucial to controlling costs at a steel mill, yet relatively few mills in China are put in such locations. Many more, including those being expanded now, are deep in the interior of the country, partly to keep them safe in case of invasion. Iron ore for these mills must be delivered from distant mines by the country's overstretched rail system, which is prone to delays measured in weeks, or by truck, which is much more expensive.
By contrast, the Nanjing mill has invested in new barges that can travel both in rivers and in the open sea, saving the time and expense of transferring cargoes of imported ore from Australia or Brazil from one type of vessel to another at an ocean port.
Nicholas Tolerico, the president of ThyssenKrupp Steel Services, the trading and distribution arm of the German steel giant, said that compared with moving iron ore by water, rail is twice as expensive, and trucks cost eight times as much. Over the last quarter-century, almost every American steel mill without access to a navigable waterway has closed, eliminating tens of thousands of jobs, because of shipping costs.
Inland mills in China are able to operate and even expand in part because of generous bank loans, but also because they are close to a booming market: Local construction. Nanjing is enjoying a building boom, too: On a 40-minute drive from downtown to the airport on a recent Saturday afternoon, 282 tall cranes could be seen working on large structures, mostly apartment towers.
As in other Chinese cities, feverish speculation has sent apartment prices in Nanjing skyrocketing. At US$24,000 to US$30,000, the price of a 180m2 downtown apartment is now roughly eight years' salary for a typical engineer in Nanjing, or 20 years' pay for a skilled factory worker, according to residents.
The boom has enriched Nanjing Steel, which now mostly makes the steel rods and mesh used to reinforce concrete. The company is in the process of doubling its output by diversifying into the big steel plates used to build ships and bridges; Yang said it expected to do so without adding workers.
As China has begun moving from central economic planning to capitalism, so has the mill. A group of private investors, whom Yang declined to identify, now owns most of the stock in the company, known formally as the Nanjing Iron and Steel Group Co Ltd. The city of Nanjing and the surrounding province of Jiangsu, which formerly owned the mill outright, now have a minority stake.
Yang, a solid-set steel executive who has been at Nanjing Steel for 30 years, said in an interview at the mill that it was no longer in the business of providing the cradle-to-grave services to workers that used to characterize Chinese state-owned enterprise.
"We will not make our company be an entire society," he said. "We will focus on iron and steel."
But like the rest of China's steel industry, Nanjing Steel faces difficulties. The most serious is an acute shortage of electricity, as power plant construction has failed to keep up with rapidly rising demand. Power rationing in the region cuts off the electricity supply to many factories for one to three days each week. Like many steel mills, Nanjing Steel is the biggest single user of electricity in the city. Close relations with the local utility have protected it from cutoffs so far; if the power did go off on short notice, molten steel in the mill would solidify.
But the mill now slows down its operations and does maintenance work during the hours when demand from the rest of the city peaks.
The company is also using more oxygen and less electricity in its furnace. But the extraction process used by its oxygen supplier requires a lot of power, so the net effect on electricity consumption is small, and using the extra oxygen raises the mill's costs.
While Nanjing Steel is in a better position than most mills, China will soon have more steelmaking capacity than its power supplies and raw materials will allow to operate, according to Liu Jinghai, who was the director of the Chinese Metallurgical Research Institute before joining World Steel Dynamics, a consulting firm in Englewood Cliffs, New Jersey, last year.
The trouble Beijing has faced in restraining investment in steel mills comes partly from the way political and economic power in China is decentralizing, said Li Cheng, a professor of government at Hamilton College in Clinton, New York. It is also a consequence of President Hu Jintao's (胡錦濤) policy of encouraging development inland while coastal provinces continue to grow on their own at a brisk pace, Li added.
Faced with the likelihood that the domestic market will be glutted at some point, Nanjing Steel is working to step up quality and productivity and getting ready to export more.
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