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China steel production cuts set to take effect

A Chinese worker polishes steel at an offshore oil engineering platform in Qingdao, China.
STR | AFP | Getty Images
A Chinese worker polishes steel at an offshore oil engineering platform in Qingdao, China.

China is set to implement some of its strictest cuts to steel production this week in a bid to head off choking winter pollution and further consolidate a fractious industry.

The first wave of production cuts will halve the rate of steel production in the north-eastern city of Tangshan, the largest steel-producing city in China. This will ultimately affect 20m metric tonnes of steel, the equivalent of about 7.5 per cent of national annual production.

Three other key steel-producing cities — Shijiazhuang, Anyang, and Handan — are to announce similar cuts. In addition, producers will also be mandated to reduce overall coking coal production by 30 per cent.

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The production cuts are part of a series of production suspensions in China's rust belt that will take effect within the next few months as environmental authorities chase public commitments to lower the concentration of particulate matter by 22 per cent this winter.

About 70 per cent of electricity in north-east China comes from coal, leading to a sharp uptick in airborne pollutants during winter as central heating systems are fired up.

Authorities have been more rigorously policing steel producers this year as the country cracks down on overcapacity and pollution in heavy industry. China's Ministry of Environmental Protection is mounting another round of plant inspections in Beijing, Tianjin and 26 other cities until January to enforce more stringent emissions guidelines.

Tangshan, which produces less than 11 per cent of the country's total steel output, has come under particular scrutiny. In March, a team of inspectors were sent by the central government to Tangshan to root out the false reporting of mill closures by local governments reluctant to obey shutdown orders.

China has struggled to reduce its renowned smog over fears that tackling pollution could reduce economic activity and raise the number of unemployed.

To mitigate these social effects and improve safety in the steel sector, regulators have instead pursued small, sometimes illegal producers while consolidating production among state-owned enterprises. The latest pollution cuts will further eliminate fringe players, leaving the country's largest producers unscathed, say analysts.

"With these production suspensions, smaller producers are the ones that have been wiped out each time pollution or production needs to be reduced," says Jonas Short, the head of China research at NSBO, an investment bank. "Bigger producers are almost immune from these sorts of pollution cuts and actually benefit as smaller competitors are wiped out."

Meanwhile, China's state-owned steelmakers have been posting record-high revenues as they have been constrained by supply-side cuts, which have boosted demand and thus prices for steel domestically.

Meanwhile, prices for low grade iron ore, one of the key ingredients for steel, have plunged more than 18 per cent in the past month, further buffering the country's biggest steel producers. With lower cost of inputs, China's largest state-owned steel producers are expected to enjoy more robust profit margins even as capacity cuts continue to reduce overall output.

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