Manufacturing News

Big steel makers prosper despite tougher smog limits

After decades of badgering by Beijing to consolidate and get cleaner, the country’s top state-owned producers are passing emissions tests that their smaller, private counterparts are largely failing.

China's biggest steel makers have rarely had it so good.

Many small steel companies are being forced to curb or shut operations for extensive inspections as part of stepped-up efforts by Beijing to combat air pollution.

As a result, China’s major steel suppliers have cranked output to record levels and enjoy the best operating margins in more than seven years.

The inspections are part of a yearslong drive to clear China’s skies of toxic air and eliminate excess capacity by forcing metal producers to modernize, merge or shut down.

The efforts appear to be paying off for the country’s so-called national champions.

Baosteel, which last year became China’s top steel maker after acquiring Wuhan Iron and Steel, posted its best first-half net profit in five years of 6.17 billion yuan ($950 million), up 78 percent from the year-earlier period.

Other big steel makers, such as Hesteel and Maanshan Iron and Steel, tripled their profits from January through June.

The campaign “might be fully legitimate but the result seems to be more benefiting the state-owned enterprises and the smaller ones are taking the hit,” said Daniel Meng, a Hong Kong-based analyst at CLSA.

Big mills’ output climbs
From January to July, steel production at big mills increased 7.5 percent while output of small producers dropped 2.1 percent, said the China Iron and Steel Association.

China aims to put at least 60 percent of its steel capacity in the hands of its 10 biggest companies by 2025, and has encouraged acquisitions and mergers. Its anti-smog campaign has provided another route to get there.

Sulfur, which is found in iron ore and coking coal, is the main pollutant from steel production. China has required steel plants to install facilities to reduce emissions of sulfur.

These facilities cost millions of yuan to install and millions more to operate. Jiangsu Yonggang, a midsize mill in Zhangjiagang in southern Jiangsu province, spent more than 100 million yuan on such facilities in 2011, a company official said.

Operating costs range from 50 to 100 yuan per ton, Meng of CLSA said. For an 8 million-ton steel plant, annual costs could run up to 800 million yuan.

This is why many mills did not use the emissions-cutting equipment despite installing it years ago, Meng said. But all have turned the equipment on now to avoid being shut permanently.

Mills in northern China will be closed if they fail to meet emission standards by Saturday, Sept. 30, according to the Ministry of Environmental Protection. The ministry’s army of inspectors has intensified its checks on the companies.

‘More rigorous’
“The inspections are much more rigorous than previous years,” said a senior manager at a state-owned mill in Shandong province. “Authorities are sending more teams to the mills more frequently. They don’t give you any notice in advance and only carry out surprise checks.”

He said “private-owned mills used to not care about emissions, so they didn’t invest in environmental equipment so their products are more competitive in terms of prices.”

But as China clamps down on environmental offenders, the smaller mills have been hit.

China had shut more than 600 steel mills producing low-grade construction steel by the end of June, accounting for total capacity of 120 million tons, according to the state-owned China Economic Daily.

In June, China said it had reduced its total steel production capacity by 42 million tons, meeting 85 percent of its full-year target.

China said the capacity cuts in the steel and coal sectors meant that 726,000 workers were “reallocated” last year. It expects to do that for another half a million workers this year.

Beijing set up a 100 billion yuan fund last year to help laid-off coal and steel workers and spent more than 30 billion yuan of it in 2016.

“It’s more difficult for small mills to cope with stricter environmental rules because they don’t have enough capital to invest,” said a trader who sells iron ore to southern mills.

He requested anonymity because he was not authorized to speak with media.

That challenge has intensified as steel prices in China retreat after a rapid rally this year that lifted profit margins of some producers to their highest levels in years.

“China’s looking to restructure the industry into a much more efficient and sustainable one over the longer term and that means cutting less efficient capacity, replacing it with new technology and less polluting operations,” said Daniel Hynes, a commodity strategist at ANZ.

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