China’s Choking Cities Means Job Cuts at Steel Town

China’s Choking Cities Means Job Cuts at Steel Town: Commodities

Zhang Fei sums up one of the headaches for China’s Premier Li Keqiang in his efforts to refocus the country’s economy. The 40 year-old contractor, who’d just earned 160 yuan ($26) for four hours work at a local steel mill, is leaning on his red motorcycle in grimy army fatigues and battered running shoes on Galaxy Street. That’s a 10-mile strip lined with forges, welders, tire repair and auto-painting shops, as well as restaurants, a school and a hospital.After a decade of failed efforts to cut outdated commodity capacity in China, Goldman Sachs Group Inc. says Li is getting serious, driven by the need to reduce severe pollution. Zhang and thousands like him on Galaxy Street live off servicing mills in Tangshan, the largest steel city in China that alone has almost five times as many blast furnaces as North America.

“If you shut these plants, we’ll all lose our jobs,” said Zhang. “If there’s no steel industry, we would have a hard time finding other work.”

Li’s push is mirrored in heavy industries across China, the world’s top steel producer and exporter, with the government in July ordering more than 1,400 companies in 19 industries to reduce capacity, targeting steel, ferro-alloys, aluminum and copper smelting.

Job Losses

Cities like Tangshan, about 98 miles southeast of Beijing in Hebei province, are marked for cuts. The U.S., Canada and Mexico combined have 32 operating blast furnaces for making steel, according to the Association for Iron & Steel Technology. Tangshan alone has 156.

Eliminating capacity means winning over regional governments reluctant to crack down on industries that provide tax income. Mass unemployment brings other concerns.

“That’s always been one of the biggest hurdles of China taking curtailment actions, it’s the job losses and potential social unrest,” said Vanessa Lau, a senior analyst at Sanford C. Bernstein & Co. in Hong Kong. “For local governments, unless you really force them, they’d rather not.”

Previous attempts to streamline China’s steel industry have stumbled. In 2009, the government scrapped the takeover of Linzhou Iron & Steel Co. after workers held an official hostage for four days. The same year, workers at Tonghua Iron & Steel Group killed an executive who demanded job cuts as part of a takeover of the company. The buyout was abandoned.

More Steel

Meantime, steelmakers boosted capacity and hired more staff, employing about 3.2 million workers in 2011, about 10 percent more than in 2006, according to a Bernstein report that cited the National Bureau of Statistics, among others.

China added 440 million metric tons of capacity in the six years to 2012, bringing the total to 976 million tons, UOB Kay Hian Ltd. said last month in a report, citing data from the China Iron and Steel Association. Another 130 million tons will be added in the three years through 2015.

As the industry expands, the state is taking out the scalpel. The five-year plan through 2015 orders the shutdown of blast furnaces smaller than 400 cubic meters (14,000 cubic feet). Steelmakers are also required to cut carbon dioxide emissions and energy use by 18 percent and to consolidate the top 10 producers.

“The local government and the central government is really stepping up efforts to shut down all this less efficient, highly polluting capacity,” Goldman Sachs analyst Julian Zhu told reporters Sept. 12 in Singapore. “Over the next three years, we believe the overall capacity to be closed is going to be much bigger compared to the last ten years.”

Hebei Steel

Tangshan, home to about 7 million people, produces half the steel from Hebei province, China’s biggest steel producing region that accounts for about 20 percent of capacity. Policy makers plan to cut 60 million tons of capacity there by 2017.

“Every company will need to improve to comply with the government’s requirement, otherwise it won’t be able to exist,” Shi Shaohui, director of company culture and media relations at Tangshan Iron & Steel Group, said at a plant near Galaxy Street.

The 70 year-old company — which has 37,000 employees and is the main unit of Hebei Iron & Steel Group (000709), China’s biggest mill — has been told to shut three iron ore processing machines.

“We will no longer add more capacity but will instead seek to produce higher-valued products,” Shi, wearing the short-sleeve, gray factory uniform with the initials of Hebei Iron, said at the plant. “China’s emphasis on the environment is also improving.”

Smog Cities

Seven of the ten cities with the worst air pollution in China in the first half were located in Hebei, including Tangshan, according to the Ministry of Environmental Protection. Pollution in the largest cities was three-times worse than levels advised by the World Health Organization, the agency said in July.

“The main problem is dust,” said Chen Junsheng, 60, a retired porcelain factory worker, who lives in Jiaanzi village community, near a steel plant in Tangshan. Large trucks carrying steel slag and sand under tarpaulins rumble up and down the black-grime covered streets. “You can’t leave the windows open at night.”

By 2014, a year earlier than planned, the government will complete its capacity reduction plan for the five years through 2015, and will seek further cuts, according to Industry Minister Miao Wei last month.

On Galaxy Street, Zhang sees a challenge for Premier Li.

“I don’t think much difference can be made without the government making a firmer determination,” Zhang said. “These local officials won’t do anything ordered by the central government.”

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net; William Bi in Beijing at wbi@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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