China’s Li Swaps Steel Production for Cleaner Air: Commodities

Apr 11, 2014 2:07 am ET

April 11 (Bloomberg) -- China’s slowing economy and tougher government anti-pollution efforts are taking a toll on its steel mills, rattling the world’s biggest producer of the alloy and flashing worries of a potential downturn in the global iron-ore trade.

The result is 2 percent of steel-making capacity will be eliminated this year, according to Mysteel.com, China’s largest industry researcher. At the same time, steel output will slow to a growth rate of 3 percent, from 7.5 percent in last year, Mysteel said.

The biggest losers may be older, private mills the government considers to be both inefficient and some of the greatest sources of foul air that is causing outrage throughout the nation. Premier Li Keqiang declared war on pollution at the nation’s top legislature in March, sending a signal that the state isn’t willing to continue to sacrifice clean air for rapid growth.

As smaller mills are squeezed out, bigger ones including Baosteel Group Corp. and Wuhan Iron & Steel Group will win market share, Moody’s Investors Service said on April 3.

“The government aims to wash out small, polluting producers and it wants a reshuffle of the steel industry,” said Hu Muzhong, general manager of Central Minerals in Hong Kong, who has traded iron ore for more than two decades.

The anti-pollution moves “will drive consolidation towards more efficient steelmaking capacity in China,” Mike Henry, president of BHP Billiton Ltd.’s marketing and technology unit, said in February.

‘Create Panic’

Mysteel estimates there are more than 300 mills that have blast furnaces that consume iron ore. This year as many as 10 plants, with annual capacity of as much as 10 million metric tons, may close or scale back operations, Mysteel chief analyst Xu Xiangchun said. That’s enough to “create panic” in the market, he said. China produced a record 779 million tons of crude steel last year.

The shrinkage comes as China weighs the heavy environmental price for economic growth, Vice Environmental Protection Minister Wu Xiaoqing said last month. The government has vowed stricter environmental-protection laws and to cut loans to heavy emitters and energy users while affirming plans to target overcapacity industries including steel.

Smog continues to plague Beijing after its air quality failed to meet government standards about half the days of 2013. Residents were warned last month to stay indoors for at least four days.

Two calls seeking comment from the Ministry of Environmental Protection’s communications department went unanswered.

Growth Target

China last month set a 7.5 percent target for economic growth in 2014, the same target as last year and lower than actual expansion of 7.7 percent in 2013. There’s already concern that target will be missed. The nation’s exports and imports unexpectedly fell in March, while two manufacturing gauges released April 1 pointed to weakness in the economy last month.

Industry observers are watching to see if the consolidation in an industry that produced about 50 percent of the world’s crude steel in February could upset commodities markets from Brazil to Australia as demand slows for raw materials including iron ore to feed those mills. China is the top buyer of iron ore, the key steelmaking ingredient, consuming 72 percent of global imports of ore delivered by ship.

Ore Sales

So far, there is no evidence of a slow down, said BHP Billiton’s Henry. Ore sales are the biggest driver of earnings for miners including BHP and Rio Tinto Group. They’re also the most-valuable commodity export for Australia, the world’s largest supplier. Data suggests Australia’s iron-ore shipments remain strong.

The picture is more dire for China’s steelmakers. Demand slumped 8.6 percent in January from a year ago as iron ore inventory at Chinese ports surged to a record and some mills defaulted.

Shanxi-based Haixin Iron & Steel Group, with annual capacity of 6 million tons a year, recently defaulted on 3 billion yuan ($483 million) in debt, Standard & Poor’s Ratings Services said in a March 31 report.

Haixin has closed its blast furnaces because of a capital shortage and is seeking to restart operations “shortly,” Duan Xuehui, head of the general office at the closely-held steelmaker said. He declined to comment on whether it had defaulted on debt.

Baoshan Iron & Steel Co., the biggest publicly-traded steelmaker, said last month it expects mill closures in the next three years.

“The government is very determined to control the pace of economic development and shift focus to the environment,” said Xu Zhongbo, chief executive officer of Beijing Metal Consulting Ltd., who has worked in the steel industry for more than three decades.

--With assistance from Rebecca Keenan in Perth, Feifei Shen in Beijing, Elisabeth Behrmann in Sydney and Jesse Riseborough in London.