Rise in steel production raises concerns

In early 2016, China announced to cut the total production of steel by about 150 million tons. For some time now, the US and the European Union have complained about the cheap and subsidized steel imports from China. The government announced to lay-off about 1.8 million workers in the relevant coal and steel sectors – which is expected to reduce overcapacity.

But the coal and steel business in the country is already down. The Chinese government plans to stop increases in production capacity and at the same time it wants to implement environmental friendly and sustainable ways of production.

After several rounds of additional crisis management in 2016, in November the same year the government again emphasized its will to curb steel production. In an official statement, the Ministry of Industries signaled to reduce production down to 100 to 150 million tons until 2020.

However, according to a recent study by Greenpeace, China’s steel output rose at about twice the amount of the whole production capacity of the UK. It rose by 36.5 million tons of steel in the period.

According to Greenpeace, three quarter of the capacity reduction has been covered by already shutdown facilities. Therefore the amount of real reduction was very little.

However, the report also points out that besides the disappointing level of reduction, the sector created new capacities – interestingly, this happened also in plants which were shutdown during this year, but were reactivated due to rising steel prices. Greenpeace calls them “zombie plants”.

This problem is related to another issue. While Greenpeace measured a slow decrease of smog during the first half of 2016, air pollution during the latter half of the year was worse than in 2015 – especially during the last two months. The blast-furnaces in the steel industry are the second-biggest source of air pollution in China.

The capital authorities had to issue a red alert, and close down kindergartens and schools.  Most of the reactivated plants are located in the Hebei area which borders the capital. Contrary to what has been expected or could have been expected given the declared aim of reducing production capacity, Hebei government’s annual growth target remains 7 percent. Hebei’s industry heavily relies on the steel sector.

Local governments are facing a dilemma because on the one hand they are ordered by the central government to reduce steel production and employment in the sector; on the other hand they will be held responsible for the possible social side-effects like retraining and re-integrating into the job market of laid-off workers and in the worst of all cases, they have to handle possible mass unemployment and arising social instability, which in turn can create a serious problem for the ruling government.

A number of countries have already announced measures to combat low steel imports from China, making it more expensive to buy Chinese steel on the European or American markets and the possibility is  that these countries will take retaliatory action, which could extend into other industries.

China has to solve this itchy problem quickly. It is not easy through, as it is connected to the overall condition and transformation of the Chinese economy.

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