Government seems "really serious" about fixing dirty air and water

China's steel industry will likely see plant shutdowns this year because of an escalation in the government's assault on air pollution, an editor with Platts' energy and metals information service said.

Li Hongmei, Platts' Chinese steel editor, said on Tuesday in a video posted on Platts' website that "a lot of medium and small mills" not heavily invested in environmental protections "probably" will face shutdowns.

"The central government seems really serious and very determined to do something (about air pollution)," Li said, calling 2014 "a turning point for the Chinese steel industry".

Li said a pullback in government investment as the GDP growth rate slows to a projected 7 percent to 7.5 percent from 10.3 percent in 2010, will "discourage" steel-mill expansion.

At the same time, output is seen as falling as China aggressively enforces more pollution control measures and focuses on industries like steel where overcapacity is roughly 200 million tons.

In the past two years, China's steel mills have operated at a 70 to 75 percent utilization rate - well below the 80 to 85 percent rate considered reasonable by international standards, Li said. The country uses just over 700,000 of its 1 billion metric tons of annual steel production capacity, she said.

If China shutters mills that fail to meet pollution control standards and regularly inspects approved ones, it could boost enforcement of environmental laws and management of overcapacity, according to Citigroup analyst Ivan Szpakowski. "We expect such environmental driven short-term closures to occur more frequently going forward," Szpakowski was quoted by Reuters.

So far closures have mostly targeted mills in Wu'an, a city in Hebei province. Hebei, a major industrial region which produces about a quarter of China's crude steel output, has promised to cut total steel capacity by 86 million tons, about 40 percent of last year's production, by 2020.

An official with a steel mill in Wu'an said his company feared that Beijing "might take more measures targeting steel mills next year to ease air pollution".

The government "can't just shut down everything as this will cause social instability and high unemployment rate, but they will do it step by step, and it's a gradual, long-term process," the unidentified official was quoted as saying by Reuters.

As the world's leading steel producer, China makes more steel than the US, Russia and Japan combined. From 2000 through 2007 it nearly quadrupled production, and accounted for more than one-third of global steel output.

But it also produces more sulfur dioxide than any other country in the world and is the world's biggest source of climate-changing carbon emissions. China's government seeks to cut the 2005 rate of CO2 emissions per unit of GDP growth by 40 to 45 percent by decade's end.

Following Beijing's lead to lower steel production in the city, Shanghai cut steel output by more than 10 percent last year.

But some observers see the nation's financial capital paying the price as steel mills around it ramp up while production is shifted from smog-plagued Beijing.

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