Silencing China's zombie steel mills no solution for smog

TANGSHAN, China Mon Feb 24, 2014 1:08am EST

1 of 22. Smoke rises from a chimney among houses as new high-rise residential buildings are seen under construction on a hazy day in the city centre of Tangshan, Hebei province February 18, 2014.

Credit: Reuters/Petar Kujundzic

TANGSHAN, China (Reuters) - 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 government is going the extra mile to clean up Hebei, China's biggest steel producer and home to seven of the 10 most polluted cities in the country, environmentalists and industry experts said.

Stirred by growing public anger over smog that often spreads to neighboring Beijing, the government summoned Hebei's leaders to a series of meetings in the capital last year and urged them to draw up plans to slash steel capacity. They eventually agreed on a target of 86 million metric tons, 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.

But 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 said.

"They are only closing steel mills that are already dead," said Xu Zhongbu, chief of Beijing Metal Consulting and a veteran industry advisor who works with steel firms in Hebei.

On the outskirts of Tangshan, a city of 7 million people that makes more steel a year than the whole of the United States, the hulking cranes and chimneys at the Qingquan Steel mill are frozen in inactivity. Workers unpaid for six months went on strike in October and haven't returned.

Qingquan Steel is one of dozens of so-called zombie mills in Tangshan, where authorities have been ordered by the provincial government to draw up a list of plants to close so output can be cut by 10.8 million metric tons this year.

"In Tangshan and other parts of Hebei, the private mills are facing the most difficult time in their history," said Xu. "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.

While Hebei had accounted for around a quarter of China's steel output, production fell to less than 20 percent in the last two months of 2013.

Huang Wei, a campaigner with environmental group Greenpeace in Beijing who has studied the impact of Hebei's industries on air quality, said 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 added.

"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 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. The Ministry of Environmental Protection in Beijing also did not respond to requests for comment.

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

MEETING TARGETS

Hebei's 250-million metric ton 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 government's immediate target is to cut steel capacity by as much as 15 million metric tons in 2014. Governor Zhang Qingwei vowed last month to fire any official responsible for even a metric ton 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," said Xu, referring to the work already being done by market forces.

Nevertheless, there has been some resistance.

An industry source said Tangshan had delayed an order to shut down 3 million metric tons of outdated steel production capacity at Tangshan Guofeng Iron and Steel, one of the city's biggest producers, until next year because it was one of the few firms to make a profit in 2013.

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 district of Fengnan have closed. Some still hope to get bank loans, while others are hoping they can get compensation from the local government, although there is no longer cash available to bail them out, experts 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," said a senior iron ore trader based in Tangshan.

"We expect to see more closures this year."

(Editing by Dean Yates)

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