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Chinese Steel Expert: No Way Out for Mills Caught in Capacity Crackdown

Chinese Steel Expert: No Way Out for Mills Caught in Capacity Crackdown

Song Jijun is no stranger to China’s drive to cut steel overcapacity. He was one of the local officials who resisted a similar directive from Beijing back in the early 2000s.

Mr. Song, who at the time was in charge of the metallurgical industry for the provincial government of Hebei, China’s main steel center, says he felt it was necessary to go the other way because market demand for steel was still growing fast 14 years ago. “I was offering support to the industry, stealthily of course,” he says, only a bit sheepishly.

Now, Mr. Song says, there may be no way out for local governments that are again under pressure to rein in capacity, because of China’s slowing economy. “The market has changed, demand has plunged, and you have to adapt to it,” he says.

The 69-year-old, who has an encyclopedic knowledge of China’s steel industry, has long retired from his governmental role but remains a go-to person for many steel bosses and government officials on anything steel-related. Based in Handan, a city about 300 miles south of Beijing, he now serves as deputy chairman of Hebei Metallurgical Industry Association, a government-backed trade group.

Mr. Song, who also sports a full head of black hair which he says is “all real,” has been busy advising companies on how to upgrade their facilities so that they can adapt to Beijing’s latest overproduction crackdown. They can do this, he says, by investing in better equipment and technology so the factories release less pollution and produce higher-grade steel, making them more acceptable in the eyes of authorities.

Steel is at the heart of China’s overcapacity problems. In 1958, Mao Zedong identified steel as the spine of China’s industrial economy and started a mad campaign aimed at leapfrogging British steel production in 15 years. That led peasants throughout the country to melt farm tools, tractors, pots and pans to feed backyard furnaces. The Great Leap Forward produced famines in the countryside, but China reached Mao’s target just two years behind schedule.

Twenty years later, Deng Xiaoping, the former leader who ushered in the current era of market-oriented reforms, created Baosteel in Shanghai as part of his push to modernize the economy. The company is now the country’s largest listed steelmaker.

Local governments built steel mills, too, with some of them among the largest tax payers in certain regions, including the northern province of Hebei. Since the late 1990s, private capital has flown into the industry as well. But the surge in the number of small producers has contributed to weak environmental standards, inefficient use of electricity and other valuable resources, and a market flooded with poor-quality products.

In 2000, China’s then-premier Zhu Rongji set out to streamline the steel industry, which he feared was growing too quickly, potentially leading to big overcapacity problems. He pressed officials to close down some of the most-inefficient coal-burning steel mills.

“But back then, the demand for steel was simply too big to cut capacity,” Mr. Song says. Instead of abiding by the central government’s orders, he says he privately encouraged private steel mills to be set up in the city of Tangshan and elsewhere in Hebei province – much as some Chinese authorities continue to do today. To do that, he provided policy supports to those steel mills and encouraged banks to lend to them, Mr. Song recalls.

In retrospect, “I still think I did the right thing, as the steel industry propelled the local economy,” he says. One regret, however, is that “it comes with a heavy environmental cost,” Mr. Song says.

China’s steel industry is now the world’s largest. It’s been one of the fastest-growing and most employment-intensive industries in the country. Yet with so many mills pumping out product and demand growing less quickly, profitability has sunk to a nadir. Shen Wenrong, the owner of China’s largest privately-owned steel mill in Jiangsu province, famously noted at a public event in 2012 that the profit from a ton of steel is now less than the margins on a simple dish of stir fried meat. It was about 2,000 yuan per ton two decades ago and about 1,000 yuan a decade ago.

Mr. Song, a survivor of the deadly Tangshan earthquake in 1976, is among those who now see the need to change. “Local governments and companies all face enormous pressure,” he says.

Upgrading facilities to meet tougher environmental and industrial standards won’t lead to increased capacity, he says, because it involves processing crude steel into higher grades of steel, rather than simply pumping out more low-grade product that isn’t needed. Experts say there’s less overcapacity for higher-grade products, and demand could rise quickly as China’s middle class grows.

A company advised by Mr. Song, Hebei Xinjin Iron & Steel Co., is investing 3.5 billion yuan ($564 million) in a new facility that it says would process crude steel it produces into more value-added products that can be used for the manufacturing of automobiles and electric appliances.

“In the past, there has been a herd mentality among steel companies. Companies would produce whatever that is easy to sell,” says Jia Jinsheng, deputy general manager of Hebei Xinjin. “But now, that mentality is changing. We have to upgrade our products.”

Source – wsj


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