Market News

 December 17, 2013
China may close more steel mills in 2014 to tackle pollution

 Steel producers in top market China may face more shutdowns next year as the government steps up its fight against air pollution, although recent closures in the Hebei province have been restricted to the key producing region for now, sources said.

Last week's order to shut some facilities in Wu'an city in southern Hebei to curb power use had stoked steel output worries, pushing Shanghai rebar futures to 11-week highs. But prices have come off almost 2% since then on expectations the closures will last for only about 15 days.

The latest drive is part of China's efforts to combat pollution, unlike a 2010 campaign when mills in Hebei, Shandong and Henan provinces were ordered to slash output from September as Beijing raced to meet a five-year energy efficiency target.

Hebei produces about a quarter of China's crude steel output, which hit a record 716.5 million tonnes last year and is forecast to rise to 780 million this year.

But output may suffer next year as China aggressively enforces more pollution control measures and focuses on industries like steel where there is an estimated overcapacity of around 200 million tonnes.

"This temporary shutdown should not have any significant impact on steel output this month but we are afraid that Beijing might take more measures targeting steel mills next year to ease air pollution," said an official with a steel mill in Wu'an.

"The government can't just shut down everything as this will cause social instability and high unemployment rate, but they will do it step by step, and it's a gradual, long-term process."

China's large steel mills had only seen an average profit margin at 2.99% for the first three quarters of this year, far lower than the average 6-7% margin for the whole manufacturing industry, according to state-owned media Xinhua, citing the China Iron and Steel Association.

If China follows through in closing mills that fail to meet pollution control standards and regularly inspects the approved ones, it could mark a "turning point" in both the enforcement of environmental standards as well as management of overcapacity, Citigroup analyst Ivan Szpakowski said.

"We expect such environmental driven short-term closures to occur more frequently going forward," Szpakowski said.

So far closures have mostly been in Wu'an, which has an annual capacity of around 40-50 million tonnes, where mills have started shutting down rolling lines and brought forward annual maintenance on blast furnaces since last week.

Rolling lines process semi-finished steel products to finished products like wire rod used for construction, while blast furnaces, fed by iron ore and coke, produce pig iron.

Calls to the local government, which issued the order, were not immediately answered.

Other cities like Tangshan, another major steel producing hub in Hebei, have not taken any similar measures yet.