China Presses Steelmakers To Cut Production – Analysis

By Michael Lelyveld

China may be signaling a shift in industrial and environmental policies as the government takes steps to reduce steel production after record output last year.

On April 28, the government announced a series of moves to lower import tariffs and raise export barriers, increasing pressure on steelmakers to cut output and help meet President Xi Jinping’s climate change goals.

Effective May 1, tariffs on imported pig iron, crude steel, scrap and other inputs were reduced to zero. Export charges on steel products and materials are now subject to increases ranging from 15 to 25 percent, the Customs Tariff Commission of the cabinet-level State Council said.

“The adjustment is aimed at reducing import costs, expanding steel imports, supporting domestic producers to cut crude steel output, guiding the industry to cut energy consumption, and pushing industrial upgrading and high- quality development in the sector,” the official English- language China Daily reported.

The unusual intervention follows a year of historically high production as China’s mills cranked out 1.05 billion metric tons of crude steel despite the COVID-19 pandemic and the slowest economic growth rate in 44 years.

China’s steel production jumped 5.2 percent from a year earlier while worldwide output fell 0.9 percent, according to World Steel Association data. The country’s share of the global steel market climbed to 57.5 percent.

Despite overcapacity problems and pressures on profits, China’s cutthroat-competitive steelmakers have boosted production through good times and bad, posting increases every year since 2016.

But with Xi’s pledge to reach a peak in carbon emissions by 2030 and achieve net neutrality by 2060, it appears that the government has finally had enough of the relentless drive for more and more steel.

“The country plans to cut crude steel output to ensure it falls year-on-year in 2021,” China Daily said flatly.

“Making the steel and other energy-consuming industries greener is an important part of China’s broader efforts to cut pollution and tackle climate change,” it said.

New limits

On May 7, the Ministry of Industry and Information Technology (MIIT) said it would continue to limit new steel production capacity in key areas to control air pollution with measures taking effect June 1, the official Xinhua news agency reported.

The outcome of the government’s efforts to curb both capacity and production will be watched closely by competitors and environmental groups.

China’s steel mills are responsible for about 15 percent of the country’s carbon emissions and over 60 percent of emissions from world steel output, according to the South China Morning Post.

Cuts are “a must for the steel industry,” said Ma Jun, director of the Institute of Public and Environmental Affairs in Beijing, the paper reported. “For an industry with such sizable emission, it needs to make a move right now.”

Advocates will also be watching the government to see whether it will allow environmental enforcement to impact industrial output and economic growth.

During the virtual climate summit hosted by the United States in April, Xi sent mixed signals on how quickly China would move to make carbon reductions that could affect economic expansion and jobs.

A plan under development for the steel industry would require the sector to reach peak emissions within four years with a 30-percent reduction by 2030, the Morning Post said.

Industry leader China Baowu Steel Group has targeted an emissions peak by 2023, but the company said that a 30- percent reduction would not come until 2035.

One sign of the government’s determination to rein in the steel industry despite the economic impact may be found in how the tariff plan came about.

In March, officials in the heavily polluted Tangshan City steel center of northern Hebei province threatened to revoke emissions permits and suspend operating licenses at four steel mills after environmental inspectors found they were ignoring shutdown orders during a regional smog alert.

The mills were fined 1 million yuan (U.S. $154,400) each and the “persons responsible” were detained, the Morning Post reported on March 14.

The case of the four mills appeared to have several implications.

First, it suggested that inspectors from the central government’s Ministry of Ecology and Environment (MEE) have continued to exert power over industrial interests after publicizing sweeping criticisms of the National Energy Administration (NEA) in January.

In their report, the investigators blasted the NEA for failures to implement “Xi Jinping’s thoughts on ecological civilization” by allowing unneeded coal-fired power plants to be built. The inspectors demanded “rectification” in an open clash over environmental policies.

In the case of the Tangshan steelmakers, the MEE also crossed political barriers, forcing municipal officials to threaten plant owners with criminal penalties.

Anti-pollution politics

The increased focus on the steel industry has also been notable for its crackdown on both carbon emissions and smog. For years, state media have covered carbon emissions and visible air pollution as separate issues without acknowledging that the steel industry is a major source of both problems.

But it is too soon to say whether the appearance of more extensive environmental enforcement will translate into political power over the polluting industries.

The fines assessed against the Tangshan mills remain modest and little more than a cost of doing business. Tariff measures imposed on the steelmakers may also motivate them to reduce output, but they have stopped short of a direct order to make cuts.

The government’s warnings to officials in the steel industry have yet to measure up to tougher steps that the government has taken against internet platform providers for anti-monopoly law violations and expansions in the financial services industry.

In a commentary on April 21, S&P Global Platts Analytics said that the government pressure on the steel industry has had little effect on rising crude steel production.

Output climbed 19.1 percent from a year earlier in March to over 94 million metric tons (mmt), pushing first-quarter production of 271 mmt up 15.6 percent, the National Bureau of Statistics (NBS) said. The surge continued with a 13-percent year-on-year gain in early April, Platts reported.

Platts called the response to government pressure a “market-moving mirage” as steelmakers took advantage of stronger prices to reap higher profits from demand driven by expectations of tightening supplies.

“The Tangshan cuts were priced in and the market may look at the output data and realize fears of steel supply shortages were unfounded,” said Platts.

In the past week, the steel market has turned volatile as iron ore costs hit record levels, pushing prices for some steel products to new highs and prompting inflation concerns.

First-quarter industry profits soared 247 percent from a year earlier to 73.4 billion yuan (U.S. $11.3 billion), the China Iron and Steel Industry Association (CISA) and Xinhua reported.

“Coming out of the pandemic, with lots of stimulus in the U.S., the EU, Japan and a few others, demand for steel is brisk and prices are high,” said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics in Washington.

“My guess is that Beijing will wink at the disobedient steel firms as long as the market is strong,” Hufbauer said.

Market strength and political strength may both be critical factors in the outcome.

On Friday, Tangshan City authorities rolled out new measures, leaving the outcome uncertain. Steel mills were ordered not to fabricate or spread price hike information on iron ore, Bloomberg News said.

So far, Xi has appeared to be unwilling to confront the steelmakers with a direct order to cut output, leaving environmental officials to test their powers with uncertain support as soaring commodity prices complicate the government’s plans.