Steelmakers: it isn’t easy going green for China’s smokestack cities

It has been more than seven years since Beijing declared war on pollution. Until now, this has been a phoney war: much posturing and little action. A crackdown on the highly polluting steel industry is changing that. The consequences for Chinese steelmakers could be severe.

HBIS, China’s second-biggest steelmaker, has shut its plants in Tangshan, the steelmaking hub of Hebei province. This has triggered thousands of lay-offs. The group is reacting to curbs imposed by the authorities of the northern city. Local governments are under intense pressure to help Beijing get plans for long-term carbon neutrality off to a flying start.

Tangshan has ordered production cuts of 30-50 per cent of capacity by the year-end. A similar reduction in crude steel output for the rest of China would mean a cutback of up to 550m tonnes, based on last year’s production of 1.1bn.

That would have a heavy impact on world supply. China is the largest producer of crude steel, accounting for 59 per cent of the market. Steel prices were already rising steeply. Stimulus spending on infrastructure was the reason. Shares in Chinese producers such as Baoshan have jumped in the past year, reflecting expectations of higher prices.

On Monday, Chinese futures on rebar — ridged poles used to reinforce concrete — hit a record high. No one expected production cuts to be so quick and deep. The problem for local makers is that they are low-cost, low-margin producers dependent on high output to cover overheads. They cannot automatically pass on ore price increases.

Net profit at the listed unit of HBIS fell a third last year even as prices rose. It is difficult for low-margin steelmakers to switch to pricier higher-quality ore supplies or to research lower-carbon production.

In the quest for steel that can build the human world without destroying the planet, higher-quality South Korean and Japanese producers have an advantage. Investors should avoid stocks and bonds issued by Chinese steelmakers.

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