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Now, China is taking another great
leap: a vast binge of industrial investment, especially in the last two years,
with steel once again in the vanguard. China has doubled its steel output since
2000, emerging as the world's largest producer by a wide margin, and is on its way
to nearly doubling it again in the next three years. The pace of spending on
new steel mills tripled from 2002 to 2003.
Concerns are growing from Beijing
to Pittsburgh about this breathtaking ramp-up of Chinese steel making, but not
because anyone thinks the 1950's disaster will be repeated. Instead, executives
and industry analysts are worried that the world will be stuck with an enormous
glut of steel that could wreck profits and touch off mass layoffs at steel
mills around the world, including those in the United States.
Worries about steel have occupied
the top leadership of China's government this week. On Tuesday, the State
Council, China's cabinet, announced that investors in new steel mills would
have to put up at least 40 percent of the cost themselves before taking out
construction loans, nearly twice the previous minimum of 25 percent. On
Wednesday, Prime Minister Wen Jiabao held a cabinet meeting to hear criticism
of a new $1.3 billion steel mill that is being built near Changzhou.
Critics say the project was pushed
through by local officials with disregard for land-use laws. The People's Daily
and other state-controlled news media denounced the project on Thursday
morning; the New China News Agency announced later in the day that eight officials
in Changzhou had been disciplined and that work on the new mill was halted.
Together with new lending
restrictions, the suspension of the Changzhou mill project sent a shiver
through commodity markets and Asian stock markets, because Chinese demand is increasingly
important to economies around the region and commodities producers around the
world.
For the moment, domestic demand
for steel in China is high, as economic growth roars ahead at 9 percent or more
a year. China now consumes twice as much steel as the United States, though its
economy is still only one-eighth the size. But more than half of that steel is
used in construction, often in the kinds of speculative projects that Beijing
has been trying to rein in.
If China's growth slows -
something the Chinese central bank has been trying to make happen in response
to rising inflation - then much of that metal may flood out of the country in
search of export markets.
"My prediction is, frankly,
we're going to be swimming in steel in the next year to 18 months," said
Jack Perkowski, the chairman and chief executive of Asimco Technologies, a big
Beijing-based auto parts company that buys a lot of steel.
If demand in China fell back to
where it was in 2000, enough surplus Chinese steel would be freed to meet
nearly one-fifth of the rest of the world's demand; it would almost equal the
total amount of steel now traded internationally.
In recent months the Chinese
government has been trying to discourage the start of work on any more steel
mills, in part because there already are acute shortages of electricity and
iron ore across much of the country. But it has been unable to dissuade
provincial governments from proceeding with many projects already under way,
nor from leaning on the local branches of national banks to lend money for
them.
"Overheated investment in
steel is no accident," The Economic Daily, an official publication, warned
this month. "It's just a prominent example of reckless investment and
low-quality excess development in some industries and regions."
The history, the problems and the
potential of China's steel industry can best be seen at one of the country's
largest and most famous steel mills, the Nanjing No. 1 Steel Works, and through
the experiences of its general manager, Yang Si Ming. The mill faces
electricity shortages and a likely domestic glut of steel in the coming years,
and is already preparing to step up exports, first to Japan and South Korea and
eventually to the United States.
The 10,000-employee mill dates
from 1958, the height of the Great Leap Forward. But it is no backyard kiln;
indeed, it was built to be a showcase of communism.
Situated on the outskirts of
Nanjing, a former capital of China, the mill is a Dickensian place where green
and orange flames leap as red-hot slabs of steel roll slowly along conveyor
belts through a long, tall shed, where they are pounded into shape and sprayed
with jets of water to smooth their finish.
Though some of the buildings are
nearly half a century old, the plant was and remains one of China's more
sensibly planned steel mills, with its own small mine nearby for low-grade iron
ore and its own dock on the Yangtze River for bringing in high-grade iron ore
by barge and for shipping out finished steel.
Frontage on the seacoast or a
navigable river is crucial to controlling costs at a steel mill, yet relatively
few mills in China are put in such locations. Many more, including those being
expanded now, are deep in the interior of the country, partly to keep them safe
in case of invasion. Iron ore for these mills must be delivered from distant
mines by the country's overstretched rail system, which is prone to delays
measured in weeks, or by truck, which is much more expensive.
By contrast, the Nanjing mill has
invested in new barges that can travel both in rivers and in the open sea,
saving the time and expense of transferring cargoes of imported ore from
Australia or Brazil from one type of vessel at an ocean port.
Nicholas Tolerico, the president
of ThyssenKrupp Steel Services, the trading and distribution arm of the German
steel giant, said that compared with moving iron ore by water, rail is twice as
expensive, and trucks cost eight times as much. Over the last quarter-century,
almost every American steel mill without access to a navigable waterway has
closed, eliminating tens of thousands of jobs, because of shipping costs.
Inland mills in China are able to
operate and even expand in part because of generous bank loans, but also
because they are close to a booming market: local construction. Nanjing is
enjoying a building boom, too: on a 40-minute drive from downtown to the
airport on a recent Saturday afternoon, 282 tall cranes could be seen working
on large structures, mostly apartment towers.
As in other Chinese cities,
feverish speculation has sent apartment prices in Nanjing skyrocketing. At
$24,000 to $30,000, the price of a 540-square-foot downtown apartment is now
roughly eight years' salary for a typical engineer in Nanjing, or 20 years' pay
for a skilled factory worker, according to local residents.
The boom has enriched Nanjing
Steel, which now mostly makes the steel rods and mesh used to reinforce
concrete. The company is in the process of doubling its output by diversifying
into the big steel plates used to build ships and bridges; Mr. Yang said it
expected to do so without adding workers.
As China has begun moving from
central economic planning to capitalism, so has the mill. A group of private
investors, whom Mr. Yang declined to identify, now owns most of the stock in
the company, known formally as the Nanjing Iron and Steel Group Company Ltd.
The city of Nanjing and the surrounding province of Jiangsu, which formerly
owned the mill outright, now have a minority stake.
Mr. Yang, a solid-set steel
executive who has been at Nanjing Steel for 30 years, said in an interview at
the mill that it was no longer in the business of providing the cradle-to-grave
services to workers that used to characterize Chinese state-owned enterprise.
"We will not make our company
be an entire society," he said. "We will focus on iron and
steel."
But like the rest of China's steel
industry, Nanjing Steel faces difficulties. The most serious is an acute
shortage of electricity, as power plant construction has failed to keep up with
rapidly rising demand. Power rationing in the region cuts off the electricity
supply to many factories for one to three days each week. Like many steel
mills, Nanjing Steel is the biggest single user of electricity in the city.
Close relations with the local utility have protected it from cutoffs so far;
if the power did go off on short notice, molten steel in the mill would
solidify.
But the mill now slows down its
operations and does maintenance work during the hours when demand from the rest
of the city peaks.
The company is also using more
oxygen and less electricity in its furnace. But the extraction process used by
its oxygen supplier requires a lot of power, so the net effect on electricity
consumption is small, and using the extra oxygen raises the mill's costs.
While Nanjing Steel is in a better
position than most mills, China will soon have more steel-making capacity than
its power supplies and raw materials will allow to operate, according to Liu
Jinghai, who was the director of the Chinese Metallurgical Research Institute
before joining World Steel
Dynamics, a consulting firm in Englewood Cliffs, N.J., last year.
The trouble Beijing has faced in
restraining investment in steel mills comes partly from the way political and
economic power in China is decentralizing, said Li Cheng, a professor of
government at Hamilton College in Clinton, N.Y. It is also a consequence of
President Hu Jintao's policy of encouraging development inland while coastal
provinces continue to grow on their own at a brisk pace, Professor Li added.
Faced with the likelihood that the
domestic market will be glutted at some point, Nanjing Steel is working to step
up quality and productivity and getting ready to export more. The mill already
ships steel for construction to Japan and South Korea.
China's voracious demand for raw
materials has driven bulk shipping rates up tenfold in the last two years, so
it is not economic now for Chinese mills to ship much steel to the United
States. In any case, China still consumes more steel than it makes, and its
imports have helped push global prices enough that the Bush administration
lifted its steep protective tariffs on some steel products last December.
Andrew G. Sharkey, chief executive
of the American Iron and Steel Institute, a trade group in Washington, said
that his members were unhappy with China's policy of pegging its currency to
the dollar but had no current plans to file trade complaints over Chinese
steel.
Mr. Yang said that he and others
in the Chinese steel industry have hopes that the country's membership in the
World Trade Organization, which it joined in November 2001, will protect them
from trade disputes.
"A lot of people have already
improved their knowledge of the antidumping regulations," Mr. Yang said.
"We will follow the rules, and we will notice if others follow the
rules."