Environmental costs weigh on struggling steelmakers

Chinese steelmakers, already obsessed with low profit margins, have been told to increase their environmental investment to help the country reduce air pollution.

As part of an action plan to curb air pollution, the Chinese government is considering expanding a "green credit" policy that orders banks to lend no more to those energy-inefficient and polluting steel companies.

According to the plan unveiled earlier this month, China vowed to take a multi-pronged approach to tackle air pollution, including cutting coal consumption in its total primary energy use to below 65 percent by 2017 from above 70 percent now.

The supply of natural gas, coal-based substitute natural gas (SNG) and coalbed methane will also be increased. New coal-fired power plants will be banned for new projects to be constructed in the Beijing-Tianjin-Hebei region, the Yangtze Delta and the Pearl River Delta regions, according to the plan.

Already among the most targeted high-polluting and energy-intensive industries, the steel sector is required to adopt new technology, upgrade equipment and eliminate outdated production methods.

For Hebei Province, the center stage of China's steel industry, the environmental pressure is imminent.

About 60 percent of steel companies in Hebei, including state-owned enterprises, were found to be causing extensive air pollution, according to the Ministry of Environmental Protection in May.

The northern China province near Beijing was partly blamed by some scientists for the suffocating smog in the country'sl capital earlier this year, given its position as China's largest iron and steel base.

Steel plants in Hebei alone produced 103.35 million tons of crude steel in the first half of this year, accounting for 26.5 percent of China's total crude steel output in the period, according to data from the Hebei Provincial Metallurgical Industry Association.

In the meantime, Hebei's steep products or cast iron output in January-June reached 116.56 million and 95.75 million tons, respectively.

Under the environmental pressure, authorities in Hebei have set the goal of cutting 60 million tons of steel output within five years, but steelmakers argued it would be hard to respond to the government's pollution-reduction call as their profit level was quite trivial among all industrial sectors.

According to statistics from China Iron and Steel Association (CISA). the country's steel industry has suffered losses since the second half of 2011, with the average profit margin falling from 2.42 percent to 0.13 percent within two years.

"With such a limited profit, steelmakers are lacking funds and motivation to follow the environmental protection plan," said Zhang Changfu, vice president of CISA.

The metallurgical industry association in Hebei projected that environmentally-friendly equipment will cost a medium-sized steel company an extra 10 million yuan (1.63 million U.S.dollars) every year only in maintenance of apparatus.

Some companies complained that environmental protection departments only focus on pressing them to install equipment, such as a dust-proof net, which costs 200 million yuan each. However, a net could be replaced by low-cost sprinklers and have the same effect.

"Actually, neglecting environmental protection project is more efficient for steel producers," said the owner of a steel company, who declined to be named.

Companies will only be fined several hundred thousand yuan for not adopting environmentally-friendly equipment. "Given the high costs in environmental protection, it's worthwhile for steelmakers to do nothing," he added.

Despite complaints from enterprises, the Chinese government seems determined to fight to the end in the battle against air pollution.

Following the release of the environmental protection plan, Vice Premier Zhang Gaoli called for resolute and steady efforts to combat air pollution in heavily-polluted areas surrounding the country's capital.

Shen Xiaoyue, analyst with the environment ministry, said banks should treat differently those environmentally-friendly steelmakers and their peers with high pollution risks.

Currently, most banks tend to assess the credit applications from steel companies in terms of their compliance with local governments, rather than carry out quantitative evaluation of the environmental risks of a steel project, thus making no difference between companies with high or low pollution levels.

Shen suggested the ending of such bank assessment mode, saying the environment ministry should come up with a set of uniform criteria over environmental risks assessment as soon as possible.

"If the loans to polluting enterprises are restricted, that will really touch the nerves of our industry," said an anonymous manager of a private steelmaker in Hebei.