Energy & Resources

Sealed with a kiss

Zhanjiang to get $11 billion steel mill. Mad idea?

Sealed with a kiss

Steel: not a hot sector anymore

Politicians kiss babies at election time and goal-scoring footballers kiss the club badge on their team shirts when their contract negotiations are due. But when a Chinese mayor locked lips on the document approving a huge new steel plant in Guangdong last month, the gesture was a bit more unusual.

The emotion may even have been genuine: the city in question had been waiting 34 years for the go-ahead.

Such was the claim from Wang Zhongbing, the ecstatic mayor, on news that state-owned Baosteel had secured final approval from the National Reform and Development Commission (the state planning agency) to build an $11 billion steel plant in the port city of Zhanjiang in Guangdong.

Pictures of Wang’s smooch were soon circulating online. He then appeared on state TV, talking excitedly about how the dreams of Zhanjiang’s seven million residents had come true at last.

“I am finally relieved of the burden that has rested on me for years,” he told his hosts.

In fact, the talk of waiting more than 30 years may be a minor exaggeration. No doubt city officials hoped to host a new steel plant in Zhanjiang from the outset of the market reform era in the late 1970s. But they didn’t submit their official request to the central government to do so until 1989.

Nor is Zhanjiang virgin investment territory today. Four years ago, the city got the nod to start preparatory work on the steel project and it has spent more than Rmb10 billion ($1.57 billion) since then on bridges, roads and power. More than 10,000 local residents have also been moved from the area identified for the plant, which provincial bureaucrats say will almost double the economic output of the area, as well as create 70,000 new jobs.

Why the yes now? Back in 2008, the Zhanjiang plan was blocked by the NDRC on concerns that the global financial crisis was biting into steel demand at a time when Chinese steelmaking had serious overcapacity issues.

That meant that the project was put on hold. Zhanjiang missed out on the subsequent boom triggered by Rmb4 trillion of stimulus spending, much of it on steel-intensive infrastructure.

But Mayor Wang seems to have reaped a dividend courtesy of stimulus mark two, as the authorities look to counter slowing growth with a new bout of investment spending, albeit on a smaller scale (see Talking Point, WiC152).

There has been a significant uptick in project approvals since the beginning of the year, with the NDRC signing off on more than a hundred projects on May 21 alone.

Many have been labelled as ‘energy-saving’ initiatives, although it’s not immediately clear if steel mills fall into this category (new plants should offer a higher-end, cleaner output). Another major steelmaking project, this one for Wuhan Iron and Steel Group to build a new mill in Guangxi, also got the go-ahead.

The anecdotal evidence is also pointing to a hive of activity at NDRC headquarters in Beijing, as other investment ideas come up for consideration. According to local press reports, taxi drivers working in the neighbourhood are delighted, with supplicants turning up in droves to seek support for their own proposals.

For Zhanjiang, at least, the final outcome looks like a reward for years of perseverance. Nonetheless, an editorial in Xinhua last week queried whether a project that seemed like a good idea so many years ago is still quite as convincing today.

One concern is that the new plant is to be built on Donghai Island, which is currently touting itself as a tourist haven and home to one of the longest stretches of beach in the country. Now it will host not only the new steel plant but also a major petrochemical facility. Both projects will boost the local economy, Xinhua admits. But will that come at the expense of blotting Donghai’s natural beauty?

Concerns about steelmaking overcapacity also persist. In late April, senior staff at CISA – the China Steel Industry Association – estimated that the industry can still produce in excess of 900 million tonnes annually, significantly above last year’s demand (domestic consumption plus exports) of a little below 700 million tonnes.

One comeback here is that the new plant is replacing older, more wasteful stock. Officials have been at pains to point this out, portraying the approvals as part of the ongoing consolidation effort across the industry. Local authorities in Guangxi and Guangdong have both agreed to cut capacity elsewhere as part of the deal, and Beijing Youth Daily reports that Guangdong’s Party Secretary Wang Yang made a personal commitment to close steel plants in the province that produce less than 10 million tonnes annually.

Another argument is that the approvals follow a consistent policy in moving China’s industrial base away from heavily populated locations. Similarly, the central government wants to see more steel production transferred to the coast, as well as to the south. The reasoning is that this provides easier access to water, as well as more efficient logistics, especially in bringing in iron ore imports from Australia.

Still, the new output is being planned at a time when the sector is reporting grim performance. Baosteel’s profits fell 60% in the first quarter, for instance, while Wuhan Iron and Steel saw a decline of 93% over the same period. At an industry level, steel companies reported losses of about Rmb1 billion, compared to a profit of Rmb25.8 billion a year earlier.

Nor do the immediate prospects look much better, with shipbuilding seizing up and new home construction likely to decline in the wake of dropping property prices.

As a result, steelmakers have been looking for more profitable lines of business. In March we wrote about how one producer was even trying its hand at pig farming (WiC142).

There have been other warnings that the sector is prone to wasteful investment, including a directive from the China Banking Regulatory Commission at the end of April that loans to the industry should be treated with caution. Admittedly, the advice relates more to steel trading firms (said to be speculating in property and stocks) than directly to the producers themselves. But the warning was still instructive: “Banks must accurately assess how slowing exports and falling domestic purchases of homes and cars will impact the demand for steel…”

Mayor Wang must be hoping that market conditions improve by the time his cherished plant is ready to begin operations.

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