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 December 23, 2014
Hebei looks to relocate its largest and most polluting industries abroad

 Hebei Province is attempting to shift its heavy industries overseas. With larger steel production capacity than Japan, Hebei is home to the most polluted cities in China. But can factories shake off a legacy of overproduction and toxic pollution to settle successfully abroad?

China's largest overseas iron and steel project was officially launched this September, when China's biggest steel maker, Hebei Iron & Steel Group (HBIS), and South Africa's Industrial Development Corporation signed a memorandum of understanding in Beijing.

The project, with HBIS's expertise and ability to operate steel-making facilities, says it will be located in South Africa's Limpopo province and supply steel at competitive prices in South Africa's downstream steel processing industry, currently constrained by uncompetitive steel prices and a lack of certain steel products.

By 2017, the iron and steel facility in South Africa is expected to churn out 3 million tons in production each year. Two years later, the production capacity will grow to 5 million tons.

Yu Yong, CEO of HBIS, said at the signing ceremony, "We will try to make the international market a new growth point for the company."

Industrial shift

The project is just the latest indication of the northern province of Hebei's ambitious plans to relocate steel, cement and glass factories to countries in Africa, South America, East Europe and the rest of Asia, pressured by overcapacity in the domestic market and growing concerns over industrial pollution.

According to a Hebei Province government notice issued last month, by 2017, it plans to move capacity for 5.2 million tons of steel, 5 million tons of cement and 3 million units of glass abroad. The targets for 2023 is more ambitious, with capacity for 20 million tons of steel, 30 million tons of cement and 10 million units of glass waiting to be relocated abroad.

Many projects are already underway. In the following two years, Hebei's State-run companies will help set up a 600,000 ton steel project in Thailand, a 350,000 ton capacity steel facility in Indonesia and a 1.5 million ton iron powder factory in Chile. On the cement front, two one-million ton capacity projects, one in South Africa and one in Myanmar, will be established with investments from the Tangshan-based Jidong Development Group and its local partners.

HBIS's acquisition of a controlling stake in Swiss-based steel trader Duferco this November is another sign that the province will expand overseas investment.

The choice of going abroad is largely driven by China's domestic production cut after years of overproduction and a glut in the market that has seen steel prices fall to drastic new lows.

China now produces half of the steel in the world. According to a report by the World Steel Association, China produced 779 million tons of crude steel in 2013, accounting for 48.5 percent of the world's total.

"Steel production is China's most competitive industry in the global market. From planning to production to management, every step of the industry is highly efficient," said Li Xinchuang, deputy secretary general of the China Iron and Steel Association and head of the China Metallurgical Industry Planning and Research Institute.

Hebei produces the most steel in China. The province produced a quarter of the country's crude steel in 2013, statistics from the Hebei Metallurgical Industry Association shows. That's more than the entire production of Japan, the second largest steel producing country in the world after China.

Apart from steel, cement and glass production have also been the driving forces of Hebei's economy. The three industries contribute to almost a third of the province's GDP, part of China's construction-fuelled decades of growth.

But they are also regarded as major sources of pollution in China's highest emitting province. According to Hebei's Department of Environmental Protection, steel, electricity, cement and glass industries account for 65 percent of the province's sulfur dioxide emissions and 61 percent of its smoke and dust emissions.

Last September, China's environmental department, along with five other national authorities, issued detailed rules on fighting pollution. Hebei, home to the most polluted cities in China, was its main target. According to the rules, Hebei should cut 60 million tons' production of steel, 61 million tons' production of cement, 40 million tons' coal and 36 million weight cases of glass by 2017. The amount is about a third of Hebei's annual production. In an interview with China Central Television, Zhang Qingwei, governor of Hebei Province, said, "If an extra ton of steel is produced, local officials will have to take responsibility and be sacked."

Economic pressure

Hebei's economy is already feeling the power of Beijing's campaign. Since last year, a province-wide campaign has seen over 8,000 companies closed, 35,000 coal-burning furnaces demolished and cement production to shrink by 22 million tons. "For each 10 million tons' cut of steel production, steel companies lose 30 billion yuan and thousands of people lose their jobs," Zhang Qingwei told People's Daily this June.

In the first half of this year, Hebei's annual economic growth was a mere 5.8 percent, last but one of China's 31 provinces and regions.

Guo Bing, environment professor at Hebei University of Science & Technology and a member of Hebei's Chinese People's Political Consultative Conference, is a staunch supporter of Hebei factories going abroad and said the economic downturn from the steel cut can be partially made up by the international investment of Hebei's factories.

"The 60 million ton cut in steel production is going to have a profound impact on Hebei's economic development. The space for development in Hebei is small due to environmental constraints. And yet as one of the most important industries in Hebei, we cannot allow it to stop developing," he said. "This applies to the cement and glass industries as well."

"This is why we have to let them go abroad, to countries where this production is most needed."

Guo said moving factories to countries in Africa and East Europe also saves shipping costs for iron ores and other raw materials, since China previously had to import them from these countries for the production of steel.

China's steelmakers have already seen growing export this year due to weakening domestic demand. "Export this year are expected to reach 90 million tons, up 20 million tons than last year. Since foreign countries have the demand, and since we have the technology, the machineries and the expertise, why don't we establish factories in foreign countries directly?" Li said.

Some factories have been moving from Hebei's urban areas to the outskirts to curb the smoke and micro-particles in the city, but Guo said the effect cannot compare with moving them abroad. "Moving factories from Beijing to Tangshan or from Shijiazhuang to Langfang cannot alleviate regional pollution as a whole."

Environmental respect

While pollution is one of the reasons that drive these factories abroad, all experts agree that paying respect to local laws and environmental rules are critical for the companies if they want to re-locate abroad successfully.

"The relocation of the factories is by no means exporting pollution," said Li of the China Iron and Steel Association. "These are the advantageous industries of China, and China is merely relocating its powerful yet superfluous production abroad. It's part of a plan to upgrade and restructure Hebei's economy," he said.

Environmental issues have been the center of controversy for many of China's overseas investment projects, and previous attempts of Chinese companies to open factories abroad have been dogged by problems. In 2009, Shanghai's Baosteel Group had to abandon a proposed joint venture to build a steel mill with Brazilian mining firm CIA Vale do Rio Doce, after failing to secure approval from Brazilian environmental authorities. Wuhan Iron and Steel Group's attempt to establish a factory in Brazil also failed.

"The factories should also work with local experts to produce products that cater to the foreign market," Li added.

Wang Guoqing, a director with the Beijing Lange Steel Information Research Center, told the Global Times, "China's rapid economic development came at the expense of our environment. But in recent years, the country has been trying to move from extensive growth to intensive growth, and Hebei's industrial restructure is a good example. To achieve that goal, it has to sacrifice some of its economic growth."