China's war on air pollution will impact steel production

Chinese Premier Li Keqiang, speaking at the annual session of the National People's Congress, has declared war on environmental pollution, which will specifically reduce the production of the steel industry.

In recognition of public anger over high levels of smog in Beijing and other cities in northeastern China in recent weeks, Li spoke out against a model of ineffective and blind economic development.

In addition to reducing emissions of particulate and hazardous particles, the government plans to close idle or obsolete factories and reduce overcapacity in the metallurgy, cement and glass industries to combat pollution.

The legacy steel production capacity will be cut by 27 million tonnes this year. Cement production, meanwhile, will be cut 42 million tons, while small coal-fired ovens will be closed nationwide, Li said.
The main obstacle to this rationalization is the regional government, which may suffer losses, as the closure of steel and cement plants would have negative consequences for local employment and tax revenues.

"If China's steel industry manages to consolidate and modernize production to meet more muted demand growth in the country, then domestic and international prices could respond positively," said a consultant at London-based Capital Economics.

“However, implementation policies so far have been patchy and, given the short-term negative economic impact, China’s progress is likely to remain limited,” he said.