Market

China’s steel production closes in on Mongolia

2019 | August | 021

Anti-smog restrictions are being implemented for the longest period in China’s industrial and key economic cities. Despite the pleasing weather, China’s administration did not leave the smog producers unscathed. The country has continued environmental monitoring until August and put up a “buffer” for production growth. In specific, China is continuing the restriction to production in Hebei, Handan, and Tangshan provinces, which were the heart of China’s economic surge in the last two decades but were transformed into smog producers. Local administrations also announced to keep the policy in the next season.

Consequently, China’s northern region that was left out of investment for many years may just become the growth capital

The policy that pressured the producers of some sectors is a part of China’s 13th Five-year plan. The People’s Republic of China, which chased economic upheaval for the last 30 years and was facing an extreme environmental degradation and pollution, made a drastic change to policy wheels four years ago and took on a path to sustainable development with a socio-economic plan. The key objective in the policy was to reduce air pollution; thus, Chinese authorities have announced to terminate the operations of smog-producers without mercy. Accordingly, the ecological standards have been tightened for producers, forcing restrictions on 21 manufacturing industries including steel and cement. China closed factories with a total capacity of annually producing 90 million of steel within the last three years.

As such, China is shocking the world with its leadership in environmental initiation and although the number of closed factories is increasing, the steel production did not stall. As it happens, it is maintaining its growth. Just last year, the steel output of China reached 928 million tons, growing 6.6 percent according to the World Steel Association. As of the end of this year, the amount is expected to grow 2-3 percent to 947-956 million tons. As for the first half of this year, China’s raw steel production jumped 10 percent to 97.5 million tons.

Chinese customs mentioned that the key commodity for steel production iron ore import grew 5.9 percent in the first half of this year to 499 million tons. Although the import fell in June, it was mostly driven by the lower supply of key importers namely Brazil and Australia instead of demand.

China’s coking coal imports grew by 3 million tons in April to 25 million tons. The annual growth is being measured at 7.4 million tons. As for the total amount from January to April, it reached 99.9 million tons, growing 2.2 million compared to the same period of last year.

According to an estimate of the related ministry of the Australian Government, China’s coal import is expected to fall slightly in 2019 and stabilize in 2020. Then why are China’s steel output and its commodity iron ore and coking coal import growing despite their pressure on the steel industry, shrinking its capacity?

The discrimination that is targeting the smog producers is affecting the key industrial region. Specifically, the regions with seaports that best utilized the geographical advantage from the end of the last century to the beginning of this one are becoming the main target of Chinese authorities. For instance, the steel production capacity in Hebei province, which makes up one-fourth of China’s total steel manufacturing, was cut by 12.3 million tons last year. It is further estimated to be reduced by 40 million tons by 2025. Because six of China’s 10 cities with the highest smog are located within the territory of Hebei province. This is the result of China’s policy on tackling the air pollution source in Beijing and other cities, covering the key industrial regions.

But will Chinese authorities leave the steel production, the development key because of smog? For this country, which consumes half of the global supply, steel is one of the main nutrition for its economy. Therefore, the Chinese Government is struggling to tackle air pollution and maintain stability in steel production.

In specific, China’s macroeconomy grew 6.2 percent last season, which was lower than expectations, growing the concerns of Chinese authorities. If it continues to slow with this pace, they will have no choice but to take measures on intensifying their economy. One of the ways is to move the infrastructure and other major development projects for the economy. In order not to collapse the economy because of air pollution, they will have to take a flexible industrial policy.

Therefore, Chinese manufacturers are changing their industrial location, shifting from the Central and Southern regions to the North. They began preparing a policy on increasing investment towards the Northwest region where industries were not developed. Even though no major changes are expected in the short-term, there are signs that state policy has already been set in motion. For example, “Fujian Sangang Group”, which was focusing on the operations in the Southeast is shifting to the west. The company is buying 1.35 million ton capacity of the steel factory of “Laiwu Steel” that is located in China’s Northeastern province Xinjiang at CNY 1.81 billion (USD260.71 million). Also, “Tangshan Jinma Steel”, which was operating in Hebei has planned an investment of CNY 12.5 billion for a steel plant in Ulaankhad city of Inner Mongolia. The capacity of the plant, which will start construction next year, will be 3 million tons annually.

Not only is this region considered for future investment, but it is also becoming an important part of the shift of China’s steel production. The steel industry is moving to its northern region in China. Inner Mongolia’s “North Heavy Industries Group” signed CNY 24.8 million or USD 3.57 million export agreement with an Indian stainless steel company. Consequently, China’s northern region that was left out of investment for many years may just become the growth capital. In this sense, the iron more market could potentially benefit Mongolian exporters.



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