Tangshan, China — When the Chinese government decided to cool down its feverishly overheated steel industry, someone forgot to tell Liu Kuiman.
This week he was prowling around his new steel mill — in a city that already has 300 steel mills — as he supervised the construction workers who were swarming over his factory on two new expansion projects.
With almost unquenchable ambition, Mr. Liu seems impervious to market signals and indifferent to the government's efforts to restrain the steel industry. He admits that his sales have been dampened by the oversupply in China's steel industry. Yet, he and his 1,400 employees show no signs of slowing down.
The grimy industrial city of Tangshan, east of Beijing near the shores of the Bohai Sea, is a front-line battleground in the debate over whether China has entered the bubble stage of its economic boom. With its 300 steel mills, almost all private enterprises that have sprung up in the past few years, Tangshan is facing accusations that it is a prime example of irrational growth and excess capacity.
China's voracious appetite for iron ore, coal and steel scrap is a double-edged sword for Canadian steel makers. On the one hand, it has triggered a sharp rise in the costs of these materials, and on the other hand, has led to higher prices for Canadian steel.
The higher prices led to sterling first-quarter results for large Canadian steel producers.
The Chinese steel boom has also helped Canadian commodity producers, which are enjoying hefty increases in exports to China.
At Mr. Liu's steel mill, huge piles of coal and iron ore are littered across the grounds of his factory. Smoke is billowing from the smokestacks. Scaffolding surrounds a new five-storey building that will house his top employees and visiting clients, and the sound of clanking and hammering emanates from the site.
“We have to depend on ourselves and the market,” he said briskly. “Now we're going to see whether we can get rid of this situation or get overwhelmed by it.”
In addition to being symptomatic of an overheating economy, Tangshan is also a potential threat to the environment. Each ton of Chinese steel requires six tons of water and 1.6 tons of ore, and the Chinese media have alleged that the inefficient steel mills of Tangshan are consuming huge quantities of natural resources, depleting the ground water of the entire province of Hebei, near Beijing.
China's crude steel production rose 22 per cent last year, reaching 220 million tons, and is forecast to jump another 17 per cent this year. China is now the world's biggest producer of steel — and the world's biggest consumer. Yet its investment in steel has far exceeded its production. Last year, its investment in steel capacity nearly doubled, with much of that money poured into the Tangshan area.
China's voracious appetite for iron ore and coal is good news for Canadian commodity producers, which are enjoying hefty increases in exports to China. At the same time, however, it has triggered a sharp rise in input prices, which has alarmed the Canadian steel industry.
The massive growth in China's steel industry is just one reason for the rising fear that the Chinese economy is overheating and could eventually suffer a hard landing. The economy was booming at an annual rate of 9.7 per cent in the first quarter of this year, and Beijing is frantically trying to restrain several key industries — including steel, aluminum and cement — which have contributed to an astonishing 40-per-cent jump in China's fixed-asset investment this year.
“When you hear people talking about getting out of the chicken-producing business amid the bird-flu crisis to invest in steel, you have an idea how hot the investment sentiment is,” one Chinese steel executive told a Hong Kong newspaper recently.
The government has warned the business community to “stop investing blindly” in “redundant and haphazard” projects. It has banned or limited the construction of new steel and aluminum factories. Its inspectors are raiding factories, demanding new pollution controls and sometimes shutting down factories, including a $300-million (U.S.) steel mill expansion near Shanghai, which was halted last month. And it has unleashed a rhetorical campaign against overinvestment, using the state media to warn ominously that the steel boom is reminiscent of the Great Leap Forward in the late 1950s, when Mao's ambition to overtake the West led to a disastrous frenzy to churn out steel at any cost.
All of this is making Tangshan a controversial place. Until recently, the city was most notorious as the site of one of the world's worst earthquakes, which killed 240,000 people in 1976. Several collapsed buildings from the quake are preserved in Tangshan as memorials. But from the ashes of that catastrophe, and from the coal and ore in the nearby hills, grew a steel industry that became one of the biggest in China.
Mr. Liu, whose factory began operations a year ago, produces low-quality steel for construction rods and pipes. This is the sector that has expanded the most dramatically in recent years, fuelled by the construction boom in China's major cities, including the Beijing Olympics and the fast-growing supply of new office towers and middle-class housing projects.
Asked whether the steel industry has overexpanded, Mr. Liu chuckles. “I probably agree,” he said. He cited the rising cost of supplies such as coking coal, which he said is 60 per cent more expensive than it was last year. But his willingness to expand his factory, he said, is a symbol of his optimism.
The same eagerness to expand is visible in other factories around Tangshan, even among those who admit they are unprofitable. Several smaller mills have been temporarily shut down — apparently as a result of recent government inspections, although their managers are reluctant to comment. But even the closed mills are vowing to reopen soon. And construction activity can be seen at other steel mills, too.
At the Jian Long steel mill, the massive frame of a new factory building — as big as a football field — is rising from the ground behind the main factory. Workers say they are worried about the expansion because they can see that the factory's sales have slipped in recent weeks. But most of the workers are well paid by Chinese standards, with wages the equivalent of about $300 (Canadian) a month. “Our life is much better than before,” one worker said.
© The Globe and Mail
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