New rules may ease China pollution, won't solve steel overcapacity

BEIJING (Reuters) - New rules aimed at making China's sprawling steel sector greener will do little to tackle rampant overcapacity or help Beijing protect its big state-owned mills from smaller, nimbler rivals.

China's environment ministry has said it will impose "special emissions restrictions" from next month on major industries from steel and petrochemicals to cement, non-ferrous metals and coal-fired power. Environmental inspections have already started in big steel producing regions.

But when it comes to steel, it's more than just pollution.

Many in the industry hope the curbs will help tackle overproduction, slash the number of privately-owned mills and boost the market share of state-owned giants such as Baoshan Iron and Steel (Baosteel), Wuhan Iron and Steel and Angang Steel.

"If we are to solve the emissions problem more effectively, reducing capacity is a part of it," said He Wenbo, Baosteel's chairman, on the sidelines of China's parliament session last week. "We approve of any effort to strengthen the laws, and no enterprise in the steel sector that has reached a certain standard will oppose it," he said, noting the implementation of environmental standards would help create a level playing field.

Wang Yifang, head of China's biggest steel firm, the Hebei Iron and Steel Group, also said China needs to use environmental controls to rein in overcapacity.

Big mills have seen their profits eaten into by smaller rivals, and the government has sought to boost the giants' competitive position by raising industry standards and thresholds. It wants its top 10 mills to control 60 percent of total capacity by 2015, up from around half now, and is likely to use "administrative measures" like pollution and resource-use standards to meet that goal.

"I think the government is sincere in its efforts to curb pollution but at the same time, it is of course trying to increase its control over the steel sector. Cleaner air and a more orderly steel industry is a win-win for China," said a government policy researcher who didn't want to be named.

WISHFUL THINKING

Still, many analysts suggest the government is again guilty of wishful thinking. While the costs of the industry minnows could increase as a result of the new pollution guidelines, the big mills could suffer just as much.

"Currently, many of the big steel mills also fail to meet environmental standards," said Cheng Xubao, an analyst at Custeel, an industry consultancy.

The new measures are part of China's response to the hazardous smog that choked Beijing in late January. While much of the smog came from vehicles and coal burning, around a fifth drifted into Beijing from surrounding regions, especially the steel producing province of Hebei, according to a study by the China Academy of Sciences.

Steel is one of the biggest polluters, largely due to the use of coking coal in the production process. China's total crude steel output of 716 million metric tons (789.25 million tons) last year would have required the combustion of some 430 million metric tons of coke.

But industry officials insist most steel firms already have the necessary equipment, including dust extractors, desulphurising "scrubbers" and protective screens. CISA Secretary General Zhang Changfu said earlier this year steel had been branded an "arch-criminal" even though it was now essentially a "green industry".

"The environmental requirements for Hebei steel enterprises ... are already basically in place. Currently, the operating conditions of the whole steel sector are very tough," said Jiang Feitao, a steel policy researcher with the China Academy of Social Sciences.

The problem is often one of oversight. Many mills turn off their equipment when inspectors aren't looking in order to cut costs, and officials tend to turn a blind eye.

"The issue is whether the machinery is running, and whether the local government has the determination to enforce it," said Henry Liu, an analyst at Mirae Asset Securities in Hong Kong, noting the problem is still fundamentally an economic one: that the local government is reluctant to strike too hard against a sector that provides thousands of jobs and millions of yuan in tax revenues. Beijing would also be reluctant to damage Hebei's economic lifeline and risk a wave of migration into the capital.

STATE VS PRIVATE

The governor of Hebei, Zhang Qingwei, said last week that while the province was committed to restructuring its massive steel sector and improving its green credentials, it was not focusing its attention on private players. "We will support those companies that do well, whether they are state- or privately-owned," he said.

On a purely economic basis, the small and private firms have performed best under tough conditions over the last two years. It's likely they are also better placed to survive any hike in environmental costs.

The CISA complained in January that profits at its member mills - mostly large-scale and state-owned - slumped 98 percent last year on weak demand and chronic overcapacity, exacerbated by the small "rampantly expanding" mills. But the CISA has always been reluctant to acknowledge that those private mills have remained more profitable than their lumbering state counterparts.

"2012 was not as bad as the media said for the steel industry, because private firms' profitability was generally better than the state-owned enterprises (SOEs)," said a steel industry official who asked not to be named.

"They are able to react faster to the market. That's because private firms control their own production; they can stop producing if they are operating at a loss, but SOEs still sell, even if they lose money on every sale."

(Additional reporting by Lucy Hornby and Coco Li; Editing by Ian Geoghegan)

Source: http://news.yahoo.com/rules-may-ease-china-pollution-wont-solve-steel-223521770--finance.html

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