China's steel producers will benefit from a plan to relocate steel production capacity from inland to coastal areas by reducing transportation costs and meeting emission requirements under the country's pollution crackdown, analysts say.
Yu Yong, chairman of the China Iron and Steel Association, a government-funded organization representing steelmakers, in January said at an industry meeting that the country's steel industry this year will focus on increasing production efficiency, changing the location of steel mills, and pushing for mergers and acquisitions. In previous years, the government has preferred pushing for a focus on cutting overall production capacity.
According to a statement from the National Development and Reform Commission in April, one of the priorities of the government this year is to capitalize on top steelmaking regions, including the Yangtze river delta, around Shanghai on the eastern coastline; the Jingjinji metropolitan region around Beijing in the north; and the Fenwei Plain region comprising the Shanxi, Shaanxi and Henan provinces further inland.
Since 2016, more than 150 million tonnes of crude steel production capacity has been eliminated as part of the country's supply-side structural reform, the statement said. The reform, which Chinese President Xi Jinping proposed in 2015, is a key component of the economic policy agenda of the world's largest steelmaker.
About 100 million tonnes of steel mills across the country have been ordered to move to coastal areas from inland regions suffering from serious environmental pollution problems, China Metallurgical News reported on July 3.
By 2025, the portion of steel capacity located in the coastal areas will increase to 70% in Shandong province and 50% in Jiangsu province, according to the China Metallurgical Industry Planning and Research Institute, a policy advising think tank. Official figures for existing levels are not available, but reports put the proportion of current steel capacity in coastal areas at less than 30%.
Amongst the 100 million tonnes of capacity, Shandong Iron & Steel Co. Ltd. is shifting capacity to Rizhao, a city in southeastern Shandong province. In the eastern province of Jiangsu, China Baowu Steel Group Corporation Ltd.'s unit Baosteel Group Shanghai Meishan Co. Ltd is moving from the province's capital Nanjing to the coastal city of Yancheng.
By moving steel capacity to be closer to ports, mills can benefit from savings in transporting raw materials, and when exporting steel products, analysts told S&P Global Market Intelligence.
"China's steel sector relies on importing raw materials like iron ore and coking coal, the relocation to coastal areas offers better transportation convenience," said Helen Lau, a metals and mining analyst at Argonaut Securities.
Lau also said that Chinese steel companies can strengthen their bargaining power after merging their capacity through the relocation.
However, Keith Tan, senior managing editor of steel and scrap with S&P Global Platts, said the jury is still out as to whether the savings will outweigh the cost of moving as companies will need to invest more on advanced facilities to meet environmental protection standards.
The relocation may also increase the economic burden on steel producers, especially private companies. Tan said this may apply to major steel producers in Tangshan, in Hebei province, which have already invested heavily in equipment to tackle emissions. "The companies relocating are a mix of [state owned enterprises] and private enterprises. If it’s an SOE, the state ultimately foots the bill," he added.
On the other hand, such costs might be offset by gaining economies of scale after steel mills upgrade their equipment. Tan said that the mills can benefit from the move by taking the opportunity to upgrade facilities and replace a number of smaller plants with a single large one.
Analysts also said the move can further eliminate steel capacity as steel mills are required to shrink the size of their capacity through the relocation, said Kevin Bai, a steel consultant with consultancy CRU and data provider Shanghai Metals Market's steel analyst Lu Ting.
Analysts believe another aim of the policy is to tackle air pollution as steel mills are moving to industrial parks where nearby residential areas are not densely populated. Lu added the government puts less pressure on steel mills in coastal areas where strong winds are able to dissipate air pollution.
Source:www.spglobal.com