Last week Australia’s Rio Tinto, the world’s second largest iron ore producer, made a bold bet on China’s steelmaking industry. There’s one small problem: The Chinese government seems to be on the other side of that bet.
Rio Tinto announced it will increase its production primarily based on positive projections about China’s steel industry, which uses iron ore as a raw material. The company estimates China, despite its current economic slowdown, will produce 1 billion tons of steel per year by 2030 — a roughly 21 percent increase on the world-leading 822.7 million tons it produced in 2014, when it accounted for roughly half of all global production.
But the Chinese government might complicate those plans. If anything, Beijing has been treating the country’s economic slowdown as an opportunity to reduce the size (and environmental impact) of its steel industry. It seems to be one part of President Xi Jinping’s blueprint, announced in January, to reorient the national economy toward a sustainable and slower-growing “new normal.”
That marks a dramatic shift for the Chinese government, which controls much of the steel industry and has a long history, dating back to Mao Zedong, of subsidizing its expansion and bragging about production numbers. Cooperation between steel manufacturers and the government was an especially attractive proposition during the 1990s and 2000s, when China required new housing and infrastructure to support the world’s fastest and most massive urbanization process.
The industry’s rapid, government-subsidized expansion during those decades — it went from producing 100 million tons of steel in 1996 to 822 million tons today — had some disastrous consequences, especially for the environment. The steel industry has become notorious among the public for causing pollution. But the government rarely wavered in its political and financial support.
Plenty of analysts have argued that it was only a matter of time until the industry’s rapid growth slowed or stalled, at least temporarily. And recent data seemed to show that moment had arrived. In 2014, as China’s growth rate slowed to 7.4 percent, its slowest rate in 24 years, Chinese steel production grew at a mere 0.9 percent — its slowest rate in 33 years.
Still, few expected that the Chinese government would ever follow-through on a plan to shrink the industry — at least until Xi’s January announcement about recalibrating China’s economy. Last week’s China International Metal Recycling Conference in the Chinese city of Qingdao gave some glimpses of what Xi’s “new normal” might mean for steelmakers.
One change is that Chinese officials are becoming increasingly forthright about the industry’s woes. Zhu Jimin, Executive Vice-Chairman of the government-run China Iron and Steel Association, didn’t shy from highlighting that China’s crude steel production declined 1.7 percent year-on-year in the first quarter of 2014. He also admitted that 52.48 percent of CISA’s members (which includes all of the major Chinese steel producers) took losses in January and February. Such data helps CISA officials in favor of shutting down excess steelmaking capacity gain a leg up in future political wrangling.
The conference also offered signs that the government intends on playing a more active role in making the steel industry more environmentally sustainable. Zhu and other speakers repeatedly emphasized that the government is now enforcing long-ignored environmental regulations — with the worst offenders taking a serious financial hit. Li Xinmin, a recently retired Director General of the Pollution Prevention and Control Department at the Ministry of Environmental Protection, announced to the assembled delegates that they would be personally “responsible for as long as you live” for environmental problems they cause. (The ministry recently announced a regulation to that effect.) It didn’t seem that Li would shed any tears if mills found to be violating environmental regulations were shut down as a result.
Meanwhile, other speakers explained that the Chinese government will soon offer legal and financial incentives to steel mills that use scrap metal as a raw material, in hopes of weaning the industry off far more polluting and energy-intensive iron ore production. (Currently only 11 percent of China’s steel is made from scrap; the government would like to raise it to 30 percent.)
It’s still too early to say what effect these initiatives will have on China’s steel industry, much less the broader Chinese economy. After all, China’s leadership is still susceptible to pangs of nostalgia for subsidized growth, as shown by last weekend’s decision by the People’s Bank of China to cut interest rates for the third time in six months. But in the long term, if China is serious about fostering a more mature and sustainable economy, its steel industry will have to shrink — and there’s nothing that Australia’s iron miners can do to change that.
Learn more here http://www.bloomberg.com/news/articles/2015-01-08/china-plays-down-stimulus-talk-as-xi-trumpets-new-normal-growth