By Michael Komesaroff
Michael Komesaroff is principal of Urandaline Investments , a consultancy specialising in China’s capital intensive industries, and a guest contributor to Dragonbeat blog this week.
China’s metals industry has an unenviable reputation for being technologically backward and highly polluting. In particular, the perception remains that China’s steel industry is dominated by thousands of small, antiquated mills producing low-quality construction steel at a high environmental cost.
Yet, while this description remains true of parts of the industry, it does not hold for the growing number of modern steel mills that operate at efficiencies close to their best international competitors.
China’s drive to upgrade its steel industry over the past decade has spawned large, world-class facilities that account for an increasing share of steel production. In 1990 only 15 Chinese steel mills had capacities above 1m tonnes per annum; now there are over 130.
As with many other heavy industries, the foundation for China’s steel industry was laid in the 1950s when Mao Zedong invited Soviet specialists to help industrialise the country. These specialists recommended technologies that suited the Soviet Union’s particular circumstances, especially its autarkic resource policies that were based on unique and complex ores.
When combined with Mao’s Third Front policies – which saw important industries hurriedly relocated from the coast to the rural interior to protect them from foreign attack – the result was a dispersed industry producing low-grade steel from small, high-polluting blast furnaces fed with fine-particle domestic iron ore.
China began modernising its steel industry in 1978 when the country re-opened to the outside world and Western companies were invited to participate in the refurbishment and construction of new capacity.
China’s first modern steel mill was built by Shanghai-based Baoshan in 1985 with assistance from Japan’s Nippon Steel. The mill, which had one of the largest blast furnaces in the world, was subsequently used as a model for other steel mills in China.
Another tactic was to buy up obsolete Western equipment, including whole plants. In 2002, Chinese workmen dismantled ThyssenKrupp’s 4.5m-tonne-per-annum steelworks in Dortmund, including blast furnaces, roll mill and sinter plant, and shipped it back to Jiangsu for rebuilding.
Using foreign technology and know-how helped China leapfrog competitors such as South Korea, putting Chinese steelmakers on the same level as those in Germany and Japan. But these technical advances also increased the country’s dependence on higher quality imported iron ore, which modern steel mills need to operate at full efficiency.
Since 2000, higher prices of iron ore and coking coal – the two key ingredients in blast furnace technology – plus surging domestic steel demand have forced Chinese mills to speed up the pace at which they embrace new steelmaking technology.
China’s steel production more than doubled since 2002, and this rapid expansion has enabled Chinese engineers to perfect the skills learned from their foreign competitors. In particular, the widespread adoption of continuous casting and pulverised coal injection has greatly boosted efficiency over the past 20 years.
In turn, these leaps in productivity have brought big environmental benefits – especially in reduced emissions of greenhouse gases and far less wasteful use of water, a precious commodity in much of China.
The vast improvements in steelmaking technology and environmental management are huge steps forward. But the average size of Chinese steel mills remains small by developed-country standards, and many decrepit and polluting old mills continue to churn out cheap rebar, despite central government efforts to upgrade the industry.
Attempts at consolidation have largely failed because local governments refuse to sacrifice local mills – and, therefore, local jobs and tax income – for the much larger national benefit. Violent worker protests after recent mergers in Jilin and Henan suggest that forcing through industrial restructuring will neither be a smooth nor a rapid process.
Yet further consolidation is precisely what is needed before China can boast that its steel industry is among the world’s best.