China steel mills face tougher emissions proposals

China plans to enforce stringent new emission regulations for steel mills with over 2mn t/yr crude steel capacity, as well as shut down blast furnaces with capacity below 1,000m³ over the next few years, which may further reduce production capacity.

The ministry of environment is seeking public comments on a draft proposal to enforce ultra-low emissions in the Beijing-Tianjin-Hebei region by 2020 and rest of the country by 2025. The new guidelines cover iron ore pelletising, sintering, coking, steel production and rolling of slabs. The hourly average emissions concentration of particulate matter, sulphur dioxide and nitrogen oxides should not be higher than 10mg/m³, 35mg/m³ and 50mg/m³ respectively for sintering machines and 10mg/m³, 50mg/m³ and 150mg/m³ for blast furnace.

The new guidelines will also curb truck transportation of raw materials and finished products of steel mills as it requires 80pc of transport of such products by railway or pipeline.

The new emission rules will cover 480mn t/yr of steel production capacity by 2020. The cost of upgrading sintering machines to meet the new emissions regulations could cost around 15-17 yuan/tonne ($2.35-2.67/t) on average for mills, while the total cost for meeting these standards for steel production could be Yn21-23/t, according to a Changjiang Securities analyst report. The rebar price was at Yn4,020/t yesterday, while profit margins of mills are around Yn1,000/t. But smaller mills that run on thin profit margins could find it harder to make extra investment compared with well-funded large steel-run mills. Compliant mills will get rebates on their environmental tax payout, further boosting their profitability.

Mills could order pollution control equipment worth around Yn30-40bn by 2020, said an analyst report by Guosen Securities. Most of the orders could be placed from late 2018 to 2019, said another report by China Everbright Securities.

"It is not ruled out that part of the production capacity could not be upgraded by the deadline of implementation of the ultra-low emissions standard, and this will have an impact on steel at that time," added Changjiang Securities.

A significant measure proposed in the draft guidelines are demolition of blast furnaces below 1,000m³ capacity in key steel producing regions. This could lead to elimination of capacity of 183mn t/yr capacity. Since some regions do not allow mills to replace more than 75pc of the total capacity, the loss in production capacity would be around 36.57mn t/yr, said Changjiang Securities. But the ministry has not set a deadline for the elimination of these blast furnaces. Small and mid-sized mills may find it harder to raise capital for replacing smaller blast furnaces.

While the proposals are unlikely to affect steel production and prices much this year, it will curb steel capacity in the medium term and aid supporting steel prices and profit margins of the steel sector.