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Overcapacity
Forged in Fire
China's leading steelmaker seeks to address overcapacity
By Deng Yaqing | NO. 31 AUGUST 4, 2016

Technicians from the Metallurgical Corp. of China monitor the operation of steelmaking equipment at the Zhanjiang Iron and Steel Co. on July 7 (DENG YAQING)

Standing on the shore of the South China Sea, Baosteel's Zhanjiang iron and steel manufacturing plant carried out a hot run test of its No.2 blast furnace on July 15, representing the completion of the first-stage of its production facility. When the Shanghai-based Baosteel, China's largest steelmaker, first began the project three years ago on the Donghai Island in Zhanjiang, south China's Guangdong Province, local residents couldn't believe their eyes because they had waited decades for it to become a reality.

As early as 1978, the former Ministry of Metallurgical Industry had taken Zhanjiang as a prospective location for an iron and steel plant. It was not until May 2012, however, that the National Development and Reform Commission approved the construction of the project. The new plant has nonetheless been constructed at a time when the iron and steel industry is in the depths of a wintery recession.

At the Central Economic Work Conference held in December 2015, policymakers put forward the five major tasks of the ongoing supply-side structural reforms in China: cutting overcapacity, destocking, deleveraging, improving weak links and reducing costs. The coal, iron and steel sectors were selected to bear the brunt of the de-capacity measures.

In February this year, the State Council issued its Opinions on Resolving Overcapacity in the Iron and Steel Industry to Gain Profits and Development, making it clear that the country plans to cut 100 million to 150 million tons of crude steel production capacity within the 13th Five-Year Plan (2016-20) period.

Meanwhile, in recent years, the United States, Canada and some EU countries have initiated an array of anti-dumping investigations and imposed high duties on Chinese-made iron and steel products. A number of Western countries have claimed that China has attempted to relieve its excess capacity issues by dumping its iron and steel products cheaply abroad.

Chinese iron and steel manufacturers have been thrown into the crucible of change in order to survive. According to statistics from China Iron and Steel Association, in 2015, its member companies registered sales revenue of 2.89 trillion yuan ($433 billion), down 19 percent year on year, with losses totaling 64.5 billion yuan ($9.67 billion).

"China's iron and steel industry has entered a contraction period, and such a trend will not end in the short term," said Cai Jin, Vice President of China Federation of Logistics and Purchasing.

Some may wonder why the Zhanjiang project was given the go-ahead amidst the capacity reduction efforts.

South China is the largest domestic steel market, the closest exit point for exports toward Southeast Asia and an important entry point for iron ore from Brazil and Australia. The Zhanjiang steelmaking project can break up the inconvenience of transporting steel from north to south China and reduce the transportation distance for steel exports to overseas countries.

"Theoretically, after being loaded onto cargo ships in Zhanjiang, steel products can be ferried to all parts of the world," Zhao Zhouli, President of Baosteel's Zhanjiang Iron and Steel Co., told Beijing Review.

To build the Zhanjiang steelmaking project, Baosteel has reduced production capacity in its Shanghai base and consolidated and eliminated existing low-end capacity in Guangdong, said Sheng Genghong, General Manager of Zhanjiang Iron and Steel Co. During the next few years, Baosteel plans to move out of Shanghai and into Zhanjiang, and part of the project's purpose is to phase out 6.6 million tons of iron and steel production capacity in Shanghai and 16 million tons in Guangdong.

A rotating furnace in Zhanjiang Iron and Steel Co.'s plant (DENG YAQING) 

Path to success

During the supply-side structural reform, low-end production capacity should be replaced with advanced capacity, said Jia Kang, President of the China Academy of New Supply-side Economics.

If, as an industrial leader, Baosteel blindly settles for its existing technological strength, it would set a bad example by allowing low-end products to occupy a larger share of the market. Baosteel plans to expand its market share by promoting advanced production capacity and to speed up the elimination of excessive capacity through market competition, said Zhao.

Targeted at the high-end market, the Zhanjiang facility doesn't produce crude steel. Instead, it specializes in manufacturing high-quality carbon steel plates.

Since its blast furnace No.1 began to run at full capacity in September 2015, the Zhanjiang plant has produced steel plates for use in vehicles, household appliances and machinery. Its output also includes quality products, such as ship steel plates, pipeline steel and carbon structural steel, which have yielded results in terms of export and market expansion.

"The way out for China's iron and steel industry's dilemma lies in improving the quality of its products, expanding the market for down-stream products and boosting exports," said Chen Bingcai, a research fellow from with the Chinese Academy of Governance.

With total investment reaching 45.5 billion yuan ($6.8 billion), the Zhanjiang project is expected to be completely finished and put into operation by November 2016 and is capable of producing, among other items, 8.23 million tons of iron and 7 million tons of commercial rolled steel.

Environmental protection

The construction and production technology provider is Metallurgical Corp. of China (MCC), a time-honored, state-owned enterprise that began to devote itself to the planning, exploration, design and building of production facilities for China's major steelmakers in 1948, including those in Anshan, Wuhan, Baotou and Shanghai. The core technology applied by MCC in the Zhanjiang project encompasses production, equipment, energy saving and environmental protection, with a localization rate surpassing 97 percent.

During the plant's construction, MCC spread the concepts of recycling and energy and resource conservation into its production. Of the 45.5-billion-yuan ($6.8-billion) investment, 6.4 billion yuan ($960 million) was spent on ensuring environmental safety.

According to statistics from MCC, manufacturing equipment in the Zhanjiang plant enjoys a sulfur removal rate of 95 percent and a water reuse rate of 98 percent. The plant has realized zero discharges of sewage and full recycling of iron-bearing dust and sludge.

So far, more than 100 energy conservation and environmental protection technologies have been applied to the Zhanjiang project, bringing sulfur dioxide emission, dust emission and fresh water consumption per ton of steel down to 0.407 kg, 0.363 kg and 2.9 cubic meters, respectively. "Related technologies utilized in the Zhanjiang project have reached the advanced levels seen in the international market," said Liu Xin, Assistant General Manager of MCC Baosteel Technology Service Co. Ltd.

"Green development, environmental protection, recycling and high efficiency together make the foundation of advanced manufacturing," said Sheng.

Copyedited by Bryan Michael Galvan

Comments to dengyaqing@bjreview.com

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