While pollution in Beijing has hovered around ‘very unhealthy’ levels, China’s Environment Minister 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 mills for what he considered “faked” production records to circumvent emissions targets.
Last month’s unusual intervention signaled the growing power of China’s Ministry of the Environment following new commitments to cut carbon emissions and greater efforts to curb one of its most polluting sectors.
But the struggle to control steel production also reflects how the government’s response to the coronavirus pandemic has undermined its plans to wean the economy from heavy industry and towards less carbon-intensive sources of growth.
Like many parts of the Chinese economy, steel production has kicked off as part of a supply-side boom that helped cushion the early blow of the crisis over the past 12 months. That has contributed to the country’s carbon emissions rising compared to 2019, unlike other major economies, according to data from the International Energy Agency.
“The coronavirus crisis has just made things clearer,” said Lauri Myllyvirta, an analyst at the Center for Energy and Clean Air Research.
“You had a sharp decline in household consumption and services, and the government responded with even more building impulses. That really meant an even greater setback to their efforts to change the economic structure. ”
In 2020, steel production in China rose 6 percent to 1.1 billion tons, the highest level of all time, while construction activity also jumped. Production was also up in 2019, as the government encouraged more infrastructure spending as growth slowed.
In Tangshan, the city government ordered most factories to cut production by 30 percent by the end of the year in March and called on seven steel mills to keep production at half full capacity until July.
This month it introduced rules requiring companies to renovate or stop using older and more polluting blast furnaces, and set a June deadline to demonstrate reduced rebates or fines. To underline the message, the environmental agency fined Rmb 1.92 billion ($ 293 million) to 48 local businesses over three days.
Tangshan party leader Zhang Gujiang told steelmakers that meeting environmental goals was a matter of survival. “There will be no way out for companies that do not thoroughly resolve their environmental issues,” he said, according to reports in the state media.
One person who worked in the industry said that while few could predict the exact direction of the policy, everyone feared further action.
Despite the fines and warnings, reducing steel capacity can be a challenge, especially when older and unused units are replaced with more efficient new technology.
“There has been a lot of investment in that sector, and much of it has certainly led to more capacity online at the major steel producers,” said Myllyvirta. “There is still a problem with smaller unregulated players just outside the capacity control system”.
While the supply of steel is difficult to control, China faces a similar challenge on the demand side. Paul Bartholomew, chief metals analyst at S&P Global Platts, suggested that one of the reasons for the high steel production last year was a “massive loosening of credit standards,” which the government is now rolling back.
That also sparked a construction frenzy, boosting demand for the metal and increasing the appeal of larger profits for producers.
“It’s a big challenge because once you start to cut production, you see prices go up,” he said. “In China, when people make money, it’s hard to recover.”
The benchmark price of steel in China rose to Rmb5,550 per ton last week, from less than Rmb5,000 a month earlier, underscoring the challenge of the market forces to the government’s ambitions.
This tension also plays a role in the real estate market. The government is seeking to reduce leverage among its largest developers, and its measures – including restrictions on total bank lending to the industry – could limit demand for steel, of which about a third goes to real estate construction.
But few expect demand to drop dramatically. S&P Global Platts estimates that steel demand in the real estate sector was 322 million tons last year, and expects between 313 million and 328 million tons this year.
Myllyvirta pointed out that many construction projects are funded by banks that are “centrally run,” meaning that any steelmaking solution must be coordinated within the broader financial system.
“Once the central government says we will no longer endorse this construct, we are ready to accept that it will mean a short slowdown in GDP growth,” he said. “Then that incentive to bypass the controls and try every trick in the book to produce more steel, it just won’t be there. “
Additional reporting by Wang Xueqiao in Shanghai