The Chinese government's resolve to improve the country's air quality looks likely to restrict steel production well into 2017.
The push for clear skies and low pollution levels in Beijing and other large cities has been a key driver of China's structural reforms, which seek to eliminate older capacity in the steel, coal, thermal power, cement and glassmaking sectors. "We hope to firmly establish a new development concept, with supply side structural reforms as the main theme," president Xi Jinping says.
The battle against pollution started in earnest in January 2015, when Beijing enacted tougher environmental laws with strong penalties and even jail time for serious and chronic polluters.
Emissions inspections were carried out throughout the year in 2016, but the intensity increased from November as the start of winter led to higher smog levels in several big cities, especially in the heavily industrialised north of the country. But other areas have also been hard hit, with smog in Chengdu in southwest China causing the cancellation of flights and stranding over 20,000 passengers in early December. And a heavy pollution forecast for some of the country's top steelmaking regions from 16-21 December added to disruptions.
Environmental inspections have forced some smaller mills that lack the necessary pollution control equipment to shut down their operations rather than risk penalties. Authorities in Hebei province, the country's main steelmaking region, told inspectors to be brusque and "not even say hello" to companies they are checking, and instead to go straight to the blast furnace or sintering units to check pollution levels themselves.
In the coastal province of Jiangsu, state-run media outlets have accompanied officials on visits to smaller mills using scrap-based electric arc furnaces. Workers have in some cases abandoned their plants as news of the inspections spread.
Authorities in Tangshan city, the steelmaking heart of Hebei, are now focusing inspections solely on smaller mills that use scrap as a steelmaking raw material, have few pollution controls and produce lower-grade materials. There is no reliable estimate of the size of China's scrap-based steelmaking sector, but it could be as high as 100mn t/yr, just under 10pc of China's total capacity.
Smaller industrial enterprises present the main problem to China's pollution control measures, the environmental protection ministry says. It identified three small mills in Shandong province that ignored recent pollution alerts. Provinces have been instructed by Beijing to implement the country's colour-coded pollution alert system far more strictly than in the past, with some county-level authorities attacked for inadequately reporting pollution data or not issuing alerts at all, despite thick smog. City authorities are likely to issue pollution alerts much more promptly and be more willing to curb steel and other emissions-intensive production facilities, at least until the end of the winter season in March.
Some officials are looking to work together with industry to cut pollution. Provincial authorities in Hebei have reached out to steel mills, sending the message that they will be able to avoid sharp swings in production if they can prove they are keeping emissions at approved levels.
But smaller mills often do not have the resources to install denitrification, desulphurisation and dust-control devices. The China iron and steel association (Cisa), the association representing the country's large and medium-sized mills, has urged Beijing to aggressively pursue small mills that violate pollution control norms. "Cisa's information work should expose these illegal small factories, to help the government identify and combat these in a manner that these mills can find no place to hide," it says.
A clampdown on smaller mills would enable Beijing to better control steel capacity. Most of China's larger mills are state-controlled and closely monitored by central agencies such as public enterprises regulator Sasac and top economic planning agency the NDRC. Beijing has set a target to consolidate 60pc of steel capacity in 10 large steel mills by 2020, compared with 34pc now.
There are no signs the government will relent in its push to raise air quality. Images of smog-filled cities threaten to sully Beijing's ambitions for China to be a major world power, with coal-fired power plants, motor vehicles and heavy industries such as steel and cement facing the brunt of government efforts to reduce pollution. And Beijing has an added motivation to push through its environmental policies, as the prospect of the US backing away from efforts to combat climate change under President-elect Donald Trump gives China the opportunity to take a more prominent role.
