Pressures Mount for Steel Makers in China’s War on Pollution

China is stepping up its battle against air pollution as the government imposes the most severe winter production curbs yet on steel mills in the country’s north to ensure it meets a target to cut PM2.5 emission levels by the end of the year.

Although the government’s campaign is well-intentioned, privately owned companies are complaining that some measures are unrealistic and that they will suffer more from the anti-pollution drive than state-owned enterprises. Some local authorities are also struggling to implement requirements that they suggest haven’t been properly thought through.

More than 100 steel makers clustered in four cities in northern China have a combined production capacity of 220 million tons, a quarter of the country’s total. Under orders from government agencies led by the Ministry of Environmental Protection (MEP), these companies, located in the cities of Handan, Tangshan and Shijiazhuang in Hebei province, and Anyang, Henan province, must keep the utilization rates of their blast furnaces under 50% during the winter heating season, which usually runs for four months starting from mid-November.

“The government is under enormous pressure to reduce pollution in the second half of this year,” Xu Dongdong and Zhong Zhengsheng, analysts with CEBM Group, a subsidiary of research firm Caixin Insight Group, said in a note last month. “We believe the production curbs during this year’s heating season for environmental protection purposes will be executed in a more draconian manner than in previous years.”

Target at risk

The steel curbs are part of the 2017-2018 Autumn and Winter Air Pollution Comprehensive Crackdown Action Plan covering Beijing, Tianjin and 26 other cities in the provinces of Hebei, Henan, Shandong and Shanxi. The far-reaching campaign, which the MEP is spearheading, runs from October to March 2018 and imposes restrictions on a vast range of activities from output and capacity cuts in heavy-industry sectors such as steel and aluminum to the use of coal by individuals in areas where there has been systematic replacement of the fuel with cleaner energy sources such as natural gas.

Since Sept. 15, the ministry has sent more than 1,000 supervisors and experts to companies and local governments in these cities to ensure the anti-smog polices are carried out.

The plan is being rolled out as the government scrambles to meet a target announced in 2013 to reduce emissions of cancer-causing fine particulate matter known as PM2.5 by the end of 2017 for the Jing-Jin-Ji region, which consists of Beijing, Tianjin and Hebei province, and is home to more than 110 million people. The goal, which Caixin has calculated would bring average PM2.5 levels down to 79.5 micrograms per cubic meter of air, was announced amid mounting public criticism over official failure to reduce the smog that covers swathes of northern China, especially during winter.

Although China had made some progress in reducing PM2.5 emissions, MEP data show that levels rose by 10.2% to 65 micrograms per cubic meter of air in 13 cities closely monitored in the Jing-Jin-Ji area in the first eight months of 2017, twice the level considered safe by the World Health Organization.

Ministry data show that PM2.5 fell in the January-August periods in 2016 and 2015, raising concerns that this year’s unusual increase could jeopardize the attainment of the target, as pollution levels traditionally rise over the winter months due to the surge in coal-fired power generation to meet heating needs.

The plan was jointly announced by the MEP, the National Development and Reform Commission, the Ministry of Industry and Information Technology, and other central agencies and relevant local authorities in mid-August after the central government announced a more general policy in February. The ministry released a 143-page document on its website on Aug. 18 specifying the targets and procedures for each sector. Ten days later, the MEP and the local governments issued another document detailing how penalties, usually disciplinary punishment by the party, would be handed down to local officials at different levels depending on the number of anti-pollution measures they failed to implement. The emphasis on penalties on individual officials underlines the authorities’ determination to enforce the rules.

As companies, markets and investors digested the plan and the restrictions to be imposed, the price of commodities and metals traded on the country’s exchanges surged amid speculation that the curbs would lead to shortages over the winter. In the three months through early September, the most-traded contracts of hot rolled steel coil and rebar on the Shanghai Futures Exchanges both jumped more than 50% to hit 4,400 yuan ($668) per ton and 4,194 yuan per ton, respectively.

Many steel plants boosted output and ran their equipment at full capacity to capitalize on the price boom. The higher output risked increasing pollutant emissions that would push up PM2.5 levels — the very thing the campaign was trying to bring down, and the price gains may have spurred some companies to look for ways to circumvent the winter restrictions.

Higher costs

The manager of one private steel manufacturer in Handan told Caixin that the company expanded one of its production lines for hot rolled steel coil, which is used in automobiles, electric appliances, construction materials, containers and steel pipes. Output has increased since July and is now running at around 300,000 tons per month, 60% more than a year ago, the manager said, who spoke on condition that he would not be identified.

He also highlighted problems with the way the government will monitor and assess a company’s compliance with the winter production cutbacks, claiming that the methodology, which uses before and after comparisons of electricity consumption data from the national grid, is flawed.

Many steel mills use the heat produced by the blast furnaces to generate electricity. The combined heat and power systems of some plants can meet 70% to 80% of their total energy needs. As the utilization rates of the furnaces decline, electricity generation will also drop, forcing mills to buy more electricity from the state-run grid, which will make their power consumption appear higher.

“The curbs on the use of the blast furnaces will break the energy recycling circle within factories, which will lead to higher overall energy consumption and significantly higher costs for companies,” the manager said. Even if a company follows government orders to restrict output, it may fail the electricity consumption test, he said.

More-aggressive implementation

Environmental protection and pollution control have become increasingly important factors in the central government’s evaluation of local officials for the purposes of promotion or demotion. As a result, many local governments have become more aggressive, not only in rolling out measures to reduce pollution but in implementing them.

Although they weren’t named in the action plan, the municipality of Tianjin, three cities in Shanxi province, two in Shandong, one in Henan and one in Jiangsu in eastern China have unveiled their own plans to curtail winter steel production.

Other cities have gone further. Handan in May ordered 28 industrial enterprises to upgrade, shut down or move out of the urban area by 2020 — a policy that will affect six local steel companies.

The fact that some cities have decided to impose output restrictions without being told to do so by the central government shows that air pollution campaign has captured the “unprecedented attention of local authorities,” CEBM Group’s Xu, Zhong and Chen Qiuqi said in a report published on Oct. 16.

An industrial promotion official in Wu’an, a small city under the jurisdiction of Handan, told Caixin that the government hopes the decision will force plants to upgrade their production lines to make them more efficient and less polluting.

“The relocation of a steel company means building a new facility because most of the existing equipment can’t be moved,” said the official, adding that new equipment is generally “more efficient” and can meet “higher environment standards.”

Lending risk

But some privately owned companies are bemoaning the costs involved in relocating and worry that banks may demand early repayment of loans because the value of the assets posted as collateral, usually plants and equipment, will fall as a result of closing their existing production facilities.

“Most firms in the steel industry that can afford the massive costs of relocation are state-owned enterprises,” said a senior executive of one of the six firms asked to move. “But private steel firms could be faced with having their loans called in if they relocate.”

“The costs of building a new plant are also beyond the means of private companies,” the executive, who declined to be identified, told Caixin.

Many steel plants are on the fringes of cities where land prices are not high, meaning the compensation they get for relocating will be low, he added.

Wu’an has also taken the initiative to extend the winter steel curbs for two months beyond the four-month term stipulated in the MEP-led action plan. Furthermore, the city made it clear that only furnaces whose internal and external thermal readings fall to room temperature will be counted as having met the production curb standards, CEBM’s analysts said in their report this week.

A room temperature facility would prove to investigators that the furnaces had not only been shut down, but had been shut down for a while.

Symptoms and causes

Zhang Haolong, a deputy head of the Division of Area-wide Coordination and Heavy Air Pollution Response of the MEP’s Department of Air Environment Management, said the authorities are experimenting with different measures to tackle the smog affecting northern China.

“The fight against air pollution in the Jing-Jin-Ji area is like crossing the river by feeling the stones,” he told Caixin, using a phrase coined by Chen Yun, vice chairman of the Communist Party from 1956 to 1982, in 1980 to describe the party’s experiments with reform. “We’ve identified the stones — the heating season and the big polluters. We are taking steps to address both the symptoms and root causes (of the pollution).”

Restricting the production of metals and the transportation of commodities by road in trucks that are often powered by highly polluting diesel, are temporary solutions aimed at mitigating the imminent “symptoms,” Zhang said.

Closing down enterprises that don’t have proper pollution-control facilities, requiring industrial firms to upgrade their equipment, and helping rural households abandon coal and switch to cleaner fuels such as natural gas are among the steps being taken to eradicate pollution, he added.

The government is trying to avoid a “one-size-fits-all” approach to controlling steel output because it may discourage companies from improving their pollution control systems on their own, Zhang said. As part of that strategy, the MEP is ranking plants by their emission levels and those with better scores will be subject to lower capacity curbs than heavy polluters.

Impractical policies

However, officials on the ground are concerned that although the policies were drafted with good intentions, they are impractical.

The simplest way to implement the output limits is to make all companies cut their output by 50% during the heating season, which means everyone can at least keep the furnaces operating, said an official with the development and reform commission of a city ordered to implement the curbs.

It would be extremely difficult for the local government to allow some to continue operating normally while ordering others to completely stop production for as long as half a year, he said. The massive cost of recommissioning furnaces and restarting production after such a long break makes it almost certain that those companies will be squeezed out of the market, he said.

The long-term solution is for steel companies to operate low-emission and low-polluting plants. But uncertainty over government policy, especially over the continuously changing definition of outdated capacity subject to closure, is deterring companies from making the necessary investment to upgrade their facilities, the manager of the private steel company in Handan told Caixin.

In 2010, the central government increased the minimum size of blast furnaces classified as outdated to 400 cubic meters, up from 300 cubic meters in 2006. But local authorities in some provinces including Hebei and Jiangsu have raised the bar even higher.

Steel plants are prepared to invest in environmental protection, and the market boom has left many firms flush with cash, the manager said. But companies are concerned that any investment they make in equipment to reduce pollution may be wasted because the furnaces could quickly become illegal. There is already speculation that the government is getting ready to classify blast furnaces smaller than 1,000 cubic meters as outdated, which will affect facilities widely used in the steel industry, he said.

As a result many companies are taking a wait-and-see approach, preferring to delay installing or upgrading their emission cleaning systems and only addressing the problem if they are challenged by investigators during a random inspection, he said.

Contact reporter Fran Wang (fangwang@caixin.com)