REPEAT:MNI Analysis: China Blue Sky Push Can't Stop Steel Glut

Repeats Story Initially Transmitted at 04:24 GMT Jan 5/23:24 EST Jan 4

--Steel Output Up Last Year Despite Capacity Cuts, Anti-Pollution Shutdowns

By William Bi

     BEIJING (MNI)  - After Chinese President Xi Jinping urged government

officials to fight the "war to defend the blue sky" late last year, Chinese

media touted unprecedented efforts by environment officials to reduce air

pollution, including closing down unregulated steel mills and issuing a blanket

ban on industrial production when air quality fell below set limits. 

     The measures have had the desired environmental impact, with Beijing

residents enjoying many more blue sky days this winter than they are accustomed

to. 

     The measures also caused steel prices to spike on speculation of shortages

while exports slumped 30% last year from the year before.

     Yet there is little indication China's overall steel output has been

adversely affected. Indeed, overall output continued to grow last year and there

are indications that China is expanding new capacity to produce higher quality

products to better compete in world markets.  

     Despite government-mandated cuts in excess steel production capacity and

anti-pollution factory closures, output of crude steel grew 3% last year from

the year before, according to the state-owned China Metallurgical Planning Net. 

     --PRODUCTION CUT FIZZLE

     The so-called 26+2 initiative, which is supposed to halt industrial plant

production in 28 northern Chinese cities during the winter when air pollution

worsens due to heavier use of coal for heating, didn't curb production as much

as anticipated, said Yu Chen, an analyst at Mysteel.com, a Shanghai-based steel

industry consultancy. 

     "It wasn't a blanket ban on production; some cities weren't affected at

all," Yu said on the sidelines of the Mysteel annual conference in Shanghai last

month. Many plants were aware of the curbs months in advance and so ramped up

production before the campaign began in November.

     Even government steps to reduce excess production capacity haven't resulted

in a net reduction in steel-making capabilities. Some plants, particularly those

forced to move out of cities, were given the green light to set up new

facilities along the coast or in uninhabited areas. Some provinces are still

trying to expand capacity in the name of optimization. Sichuan, for example, is

pushing to add new electricity-powered furnaces with a capacity of 10 million

tons, and authorities seem to be receptive.

     In an interview with the official Economic Information Daily last week, an

official at the Ministry of Industry and Information Technology acknowledged

that some local governments are doing their best to bend rules to help

businesses expand production capacities. 

     --SEIZING PROFIT OPPORTUNITY

     It's hard to resist adding to steel-making capacity given the elevated

prices seen the past year. For those firms that survived the environmental

crackdown, 2017 was an incredibly profitable year, as evidenced by the thousands

of enthusiastic company delegates gathered at five-star hotels near the

cavernous Shanghai Convention and Exhibition Center for International Sourcing,

where the Mysteel conference was held. 

     "Two years ago you were all glum; last year you were smirking; this year

you were all smiles," Xu Xiaonian, an economist at the China Europe

International Economic School, told the delegates.  

     Given strong demand and even stronger desire to take advantage of that

demand, Mysteel estimates that the steel surplus may be as much as 25 million

tons this year. Such a surplus would offset most of the 35 million ton reduction

in Chinese steel exports seen last year, continuing to fuel tensions with key

trading partners over China's excess capacity.

     --HONING COMPETITIVE EDGE

     This may be intentional. Even as China acts to curb its capacity for

low-end steel, it is also actively encouraging the output of high-end products,

directly competing against the products of Western trading partners. While the

Mysteel conference was underway, China's Commerce Ministry announced it would

remove a tax on steel product exports from Jan. 1. 

     When asked by MNI whether the government's action would revive slumping

exports, Liu Zhenjiang, chairman of the state-backed China Iron and Steel

Association, said that will be decided by market conditions.

     Liu showed evident displeasure with foreign criticisms of the Chinese steel

industry. In a defiant speech at the conference, Liu blasted the United States,

a frequent and vocal critic of China, as "full of endless chatter and

unscrupulous attacks," while dismissing Europe's deregulation of its own steel

sector as a failure.  

     China will "walk its own path," decide on its own policies and strategies

and become an even stronger steel nation, Liu said. 

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com