Identifier
Created
Classification
Origin
06BEIJING8879
2006-05-12 06:30:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:  

STEEL CHINESE GOVERNMENT RESEARCHERS, STATE-OWNED

Tags:  ECON EIND ENRG ELAB SENV WTRO CH 
pdf how-to read a cable
VZCZCXRO2258
RR RUEHCN RUEHGH
DE RUEHBJ #8879/01 1320630
ZNR UUUUU ZZH
R 120630Z MAY 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 5101
INFO RUEHCN/AMCONSUL CHENGDU 6228
RUEHGZ/AMCONSUL GUANGZHOU 0462
RUEHGH/AMCONSUL SHANGHAI 4506
RUEHSH/AMCONSUL SHENYANG 6029
RUEHHK/AMCONSUL HONG KONG 7357
RUEHIN/AIT TAIPEI 5528
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 1045
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 03 BEIJING 008879 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EB/TPP/BTA, AND EB/IFD/OIA
STATE PASS USTR FOR STRATFORD/MCCARTIN/KEMP
TREASURY FOR OASIA/ISA
USDOC FOR 5101/ITA/IA
USDOC FOR 4220/ITA/MAC
USDOC FOR 1003/ITA/OUS
USDOC FOR 6310/ITA/TD/OIEM

E.O. 12958: N/A
TAGS: ECON EIND ENRG ELAB SENV WTRO CH
SUBJECT: STEEL CHINESE GOVERNMENT RESEARCHERS, STATE-OWNED
ENTERPRISE EXECUTIVE DISCUSS STEEL POLICY ISSUES

REF: (A) 05 BEIJING 18221

(B) BEIJING 08615

UNCLAS SECTION 01 OF 03 BEIJING 008879

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EB/TPP/BTA, AND EB/IFD/OIA
STATE PASS USTR FOR STRATFORD/MCCARTIN/KEMP
TREASURY FOR OASIA/ISA
USDOC FOR 5101/ITA/IA
USDOC FOR 4220/ITA/MAC
USDOC FOR 1003/ITA/OUS
USDOC FOR 6310/ITA/TD/OIEM

E.O. 12958: N/A
TAGS: ECON EIND ENRG ELAB SENV WTRO CH
SUBJECT: STEEL CHINESE GOVERNMENT RESEARCHERS, STATE-OWNED
ENTERPRISE EXECUTIVE DISCUSS STEEL POLICY ISSUES

REF: (A) 05 BEIJING 18221

(B) BEIJING 08615


1. (SBU) Summary: Chinese steel industry analysts and insiders
consistently point to China's private steel mills as the target of
the Central Government's call for reductions in domestic steel
production capacity. Beijing will use environmental protection
and energy conservation laws and regulations as its primary tools
in this effort. At the same time, Beijing is promoting the
consolidation and technological advancement of its larger state-
owned steel mills in a bid to create internationally competitive
steel mills. The most
significant roadblock to the reduction in capacity will be
Beijing's need to coordinate its actions with local governments
bent on preserving local tax revenue and jobs, according to local
steel experts. China's continued growth in demand for steel also
will complicate efforts to eliminate low-quality production.
Beijing's mounting concern about broader industrial overcapacity
ensures that the steel policy and issues relating to it will not
fade
away anytime soon. End Summary.

Sinosteel Executive Comments On Steel Industry History, Steel
Policy
-------------- --------------
--


2. (SBU) Vice President of Sinosteel Corporation, Dong Zhixiong,
commenting on the National Development and Reform Commission's
(NDRC) 2005 Steel Policy, said that the national policy is
centered around a philosophy of transitioning China from being a
large steel making country to that of a strong steel making one.
China must contain the growth of its steel industry if it is to
accomplish this goal. Dong said that between 2000-2005 China
invested some USD 85 billion in its steel sector. China in 1996
exceeded 100 million metric tons of annual production for the

first time in its history. It took China another seven years to
add an additional 100 million metric tons of annual production,
but by the end 2004, China already had added yet another 100
million metric tons of
production. China produced some 340 million metric tons of steel
in 2005, accounting for around 30 percent of the world's total
steel production, and in 2006 will add still another 40 million
metric tons of production capacity. Vice President Dong said that
the most serious difficulty in implementing the steel policy will
be the lack of coordination between Beijing and local level
governments. The NDRC is preparing a list of outdated steel
producers that will be targeted for elimination, but coordination
and cooperation with local authorities will be necessary to
achieve the closures. (Note: For previous Post
reporting on China's steel policy, please see Ref (A). End Note.)


3. (SBU) Vice President Dong said China must contain the rapid
growth in the steel industry if it is to achieve the desired
reform advocated in the steel policy. China has some 100 million
metric tons of outdated and inefficient steel production that must
be eliminated. Dong said that there are three primary elements
to the steel policy. First, China needs to change its steel
output to focus on value-added products rather than on gross
production. Second, China must consolidate its steel sector
through a strengthening of the integration of its steel mills.
The country currently has more than 800 steel mills, with the 15
largest mills only accounting for around 45 percent of China's
total steel production. China's goal is for its top ten largest
mills to account for some 50 percent of total production by 2010,
and by 2020, aspires to have its top ten steel mills accounting
for some 70 percent of total production. Third and finally, China
wants to reduce the industry's annual energy consumption and
environmental degradation resulting from steel
production.

Development Research Center Official Weighs In On Steel Policy
Issues

BEIJING 00008879 002 OF 003


-------------- --------------
---


4. (SBU) Yang Jianlong, Senior Research Associate at the
Industrial Economics Research Department of the State Council's
Development Research Center, said the Central Government enacted
the steel policy to remedy the trend of local and provincial
governments promoting small-scale steel mill projects, including
those involving private investment, without adhering to Central
Government standards. Yang acknowledged that during 2003 and 2004
these types of small-to-medium sized steel enterprises helped
China to meet its high construction sector-led demand for iron and
steel. The enterprises, however, concomitantly caused problems,
most notably environmental damage, disproportionately high energy
usage, and production of only one type of steel product. The
Central Government wants to discourage the further establishment
of these types of
enterprises and to discourage enterprises lacking steel-making
experience from entering the market.


5. (SBU) Yang said the steel policy is intended to promote
industry consolidation, along with the growth of the higher
technical standards and production skills necessary to compete
with major international steel industries. Rather than simply
shutting down enterprises, Beijing and local governments will look
to market competition and relevant laws and regulations to foster
the needed consolidation of the industry. The Central
Government, for its part, will aid consolidation through the
setting of higher environmental and technological standards for
new and existing steel enterprises. These
standards will be reflected in the Natural Resources Savings Law
that is currently being drafted and through amendments in the
Environmental Protection Law. Yang suggested that the
environmental law amendments in particular would require many
small steel enterprises to quickly invest in expensive
environmental technology to the point that many would be forced to
withdraw from the market.

CASS Researcher Notes Private Mills The Overcapacity Problem
-------------- --------------


6. (SBU) Dr. Lu Tie, Professor, Institute of Industrial Economics
at the Chinese
Academy of Social Sciences (CASS),said that China as of April
2006 has some 470 million metric tons of steel production
capacity. China must still import some high-end steel products,
despite this production capacity. Dr. Lu stated that this is
clear evidence that the Chinese Government must simultaneously
take steps to eliminate backward steel production and raise the
technical standards of the remaining steel enterprises. The
Central Government must carefully consider local political
concerns, particularly the loss of tax revenue and jobs in the
local economy, while undertaking this reform.


7. (SBU) Dr. Lu stated that entry-level steel production
technology during the past ten years hs progressed rapidly,
facilitating the start up of many private steel enterprises in
China. These recent entrants into the Chinese steel market are
largely making low-end products, primarily for the construction
sector. Dr. Lu noted that private steel enterprises currently
account for around 100 million metric tons of steel production in
China. These enterprises have a cost advantage over SOE's because
they employ low-wage migrant workers to whom they do not provide
social services such as health insurance. The private steel
enterprises have also largely avoided investing in costly
environmental
protection technology and equipment. Dr. Lu stated that
conversely, SOE steel mills are attempting to retool their
production processes to produce increasingly complicated steel
products and to respond to Central Government calls for increased
investment in environmental protection and energy conservation
technologies.


BEIJING 00008879 003 OF 003


CISA Backs CASS Assessment Of Overcapacity
--------------


8. (SBU) Yang Zunqing, Deputy Secretary-General of the China Iron
and Steel
Association (CISA),stated that the Chinese steel industry is
currently in a situation where it has too little high-value
production capacity while carrying overcapacity in low-value
production capacity. CISA's position is that the Chinese steel
industry must do a much better job of coordinating and organizing
its product pattern to alleviate this problem. Yang noted that
some 700 private or partially stated-owned steel mills are members
of CISA compared to only around 100 wholly-owned SOEs. Despite
representing only about 12 percent of CISA's rolls, the SOE's
account for almost 60 percent of China's steel making capacity.
Yang went on to note that based upon a metric of production
quality, environmental protection efforts, and energy consumption,
a high percentage of China's backward steel production capacity is
in its private steel mills.
Some sixty percent of China's steel production capacity is located
in northeast China, according to Yang. A large percentage of
these mills are situated in or near large cities, and many are in
areas where there are water shortages. Yang stated that the
policy-mandated reorganization of the Chinese steel industry must
also lead to a rectification of this geographical problem as well.

Comment: Small, Private Steel Mills Beware, Many Want To Shut You
Down
-------------- --------------
--------------


9. (SBU) The Chinese Government is very concerned about
industrial overcapacity as evidenced by recent articles relating
to this problem in the local and English language press.
Environmental protection and energy conservation measures appear
to the most robust tools available to Beijing at present to
address this problem. Steps such as charging varying electricity
rates to enterprises in energy-intensive industries, including the
steel sector, based upon a NDRC determination whether a particular
enterprise is classified as encouraged, permitted, restricted, or
eliminated, are currently underway.
The NDRC, in its November 2005 circular implementing this
practice, stated that it is a macro-economic control combining
price and industrial policy that has already been proven to
restrict excess development of energy-intensive industries.


10. (SBU) CISA, CASS, and other local observers consistently imply
that the 100 million metric tons of excess capacity identified in
the steel policy resides in small, private mills, and these
enterprises should bear the brunt of the NDRC's macro-economic
control measures. It is unclear whether the Central Government's
policies will actually remove this production capacity in the face
of forecasts that China's steel demand will continue to grow'CISA
estimates by 10-13 percent in 2006'in the foreseeable future. It
is increasingly apparent based upon local and English language
press reports, along with recent Econoff visits to steel
enterprises in Hebei Province (Reftel B),that the mandated
consolidation of SOE steel enterprises is underway, and that
Beijing intends for these new conglomerates to compete
internationally both in terms of gross output and in the
technology employed to produce their products. China's
considerable challenge moving forward in implementing its steel
policy will be to balance this consolidation and technological
upgrade of its state-owned steel enterprises, while simultaneously
meeting double-digit increases in steel demand and fulfilling its
stated intent to remove excess steel production capacity.

RANDT