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Steelmakers: It’s not easy to go green for China’s smoky cities

It has been more than seven years since Beijing declared war on pollution. To this day, it is still an obsessive battle: more effort and less action. A suppress about the highly polluting steel industry is changing that. The consequences for Chinese steelmakers can be devastating.

HBIS, China’s second-largest steel producer, has closed factories in Tangshan, the steel production hub of Hebei province. This has caused thousands of layoffs. The group is reacting to the curbs imposed by the northern city government. Local governments are under strong pressure to help Beijing achieve a long-term carbon neutrality scheme.

Tangshan has ordered an output cut of 30-50% of capacity by the end of the year. Similar reduction in crude steel production for the rest of China means a cut to 550 million tons, based on last year’s output of 1.1 billion.

That will heavily affect world supply. China is the largest crude steel producer, accounting for 59% of the market. Steel prices have risen sharply. This is due to the stimulus in spending on infrastructure. Shares in Chinese manufacturers like Baoshan have soared over the past year, reflecting higher price expectations.

On Monday, China’s rebar futures prices – the grooved pile used to reinforce concrete – hit a record high. No one expected such quick and deep production cuts. The problem for domestic producers is that they are low cost, low margins that depend on high output to cover overhead. They cannot automatically raise the price of ore.

HBIS net profit fell by a third in the last year even as prices rose. It is difficult for steelmakers with low margins to switch to a more expensive supply of higher quality ores or to research into lower carbon production.

In the quest for steel that could build the human world without destroying the planet, higher quality Korean and Japanese manufacturers had an advantage. Investors should avoid stocks and bonds issued by Chinese steelmakers.

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