The silver lining in China’s smog

Reining in China’s overheated steel industry has proven an impossible task for Beijing, but now the country’s pollution problem could provide a solution.

One of the hottest topics on Chinese social media recently has been air pollution. Millions of users have posted photos of cities shrouded in a yellow haze and school children in Shanghai have been told to stay indoors.

Beijing’s propaganda machine has been desperate to put a positive spin on the smog. The nationalist tabloid Global Times has even claimed that the thick smog, which reduces visibility to a few metres, is conducive to missile defence!

Needless to say, no one was impressed by the spin and the offending post was swiftly removed. However, there is a silver lining to this gathering dark smog.

China’s worsening pollution problem is going to help Beijing achieve something that it has failed to deliver over the past eight years – curbing excessive capacity in the world’s largest steel industry.

Beijing has been trying to consolidate the fragmented industry since 2005. It has failed spectacularly. Chinese steel production has more than doubled in the last eight years from 470 million tonnes a year in 2005 to nearly one billion tonnes in 2013.

China’s steel output is seven times larger than Japan’s, the second largest producer in the world.

Despite the significant growth in the industry, its profitability has taken a nose dive. Chinese steel mills were earning healthy margins of around seven to eight per cent before the global financial crisis. In 2009, it dropped to 2.9 per cent.

According to figures from the China Steel and Iron Association, margins for steel mills stood at a razor-thin 0.41 per cent for the first three quarters of 2012.

Shen Wenrong, chairman of Shagang Group, the country’s largest private steel producer, said the profit for a tonne of crude steel was less than a simple stir-fried meat dish.

Despite miniscule profit margins, Chinese steel mills have kept on producing. Some have reportedly even been churning out steel at a loss. Their actions seem to defy common sense.

China’s peculiar political economy has contributed to this strange state of affairs.

A lot of steel mills in less economic developed regions are some of the largest employers and contributors of tax revenues to cash-strapped local governments.

Production decisions are often intertwined with the need to preserve social stability at all costs, a top priority for local officials.

So Beijing’s efforts to clamp down on the steel industry have been thwarted by powerful vested interests in local government and banks.

This impasse is likely to break soon as a result of China’s rapidly deteriorating environment. Chinese citizens are getting increasingly restive with the problem and some have even taken to the streets to protest the polluting projects.

The rising environmental awareness is putting the government on notice. Premier Li Keqiang has pledged to phase out polluting industries in a bid to put the country on a more sustainable economic growth path. 

In October, the State Council (the Chinese cabinet) said it wanted to phase out 80 million tonnes of steel production capacity in the next five years. 

To put that in perspective, Australia produced about five million tonnes of steel in 2012, according to the Australian Steel Institute.

Chinese analysts believe this new directive is likely to be more effective this time due to mounting public displeasure over the worsening environmental problem.

Hebei, one of the largest steel making provinces in China, just announced its own ambitious goal to reduce its steel production capacity by 60 million tonnes and coal consumption by 40 million tonnes in the next four years. Seven out of ten of the country's most polluted cities are in the province. The steel industry is a big contributor to the problem.

Officials there have been under pressure to clamp down on polluting steel production facilities. Hebei’s geographical proximity to Beijing has made the need to act even more urgent. 

The provincial government forcibly closed down ten steel mills recently. The combined capacity of these mills was about 6.8 million tonnes.

One local official said “we prefer blue skies over tax revenue and we want to preserve a good environment for future generations rather than just keep growing the GDP,” according to Chinese media.

Follow Peter Cai on Twitter: @peteryuancai

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