Chinese Steel Producers Exploring Investments in Other Asian Countries Amid Stringent Emission Standards

In line with the global drive towards decarbonisation, China has doubled its focus on environmental protection and GHG emission policies. It has enacted stringent curbs on the steel industry, which accounts for the highest energy consumption of 13% among all industries and is responsible for heavy carbon emissions. These curbs include production cuts in smog-prone regions during winter and switch to an ultra-low emission standard. China has already been consolidating emission standards in the iron and steel industry over the last few years.

These curbs are not only limiting carbon emissions but also prompting Chinese steel producers to move towards electrical arc furnaces and greener steelmaking, putting severe operational pressure on several small Chinese mills. The large steel players have been largely successful in meeting the tighter environmental norms. Aided by a series of M&A in the domestic steel industry, China increased its steel output by 5% y/y in 2020.

The curbs are expected to be implemented with even greater severity as the government aims to crack down on environmental regulation violators. The Chinese ministry has pledged to cut production from the record high in 2020-21 to pare emissions and reach peak national carbon emission by 2030. The new guidelines on emissions also suggest that the government may increase the share of electric arc furnace (EAF)-produced steel from the current 10% to 15-20% by 2025. This is expected to increase the cost of production, as EAF and other green steelmaking techniques are more expensive than blast furnaces. Focus on recycling steel with the use of steel scrap may also prove to be expensive for steel producers. These factors have already pushed steel prices to record highs in China, which may rise further as ageing steel output may go offline owing to environmental regulations.

Crude steel production and compliance rate in provinces

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Source: Nature Sustainability

The curbs have particularly hit hard the city of Tangshan (home to 126 blast furnaces and 30 steel producers), which produced 144m tons of crude steel in 2020, surpassing Japan’s throughput. The city witnessed five rounds of emergency curbs on local polluting industries in 2021 to reduce emissions and air pollutants. The Tangshan government also imposed curbs from March through December 2021 on steelmaking operations at 23 mills, due to the violation of operational measures issued to reduce pollution. Steel mills, including Yanshan Iron & Steel, Tangshan Stainless Steel, Huaxi Iron & Steel, Rongxing Iron & Steel and Xinbaotai Iron & Steel, will also shut down all their production facilities amid stringent environmental norms and industry pressure.

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Source: OECD

Concerned over potential operational disruptions, several Chinese steel producers are investing outside China, primarily in Southeast Asian countries with less stringent environmental norms, to optimise their operations and enhance flexibility. Most producers, however, accept that ultra-low emission is expected to become a standard globally.

Countries, such as Indonesia, Malaysia, Cambodia, the Philippines and Myanmar, have benefited from this geographic diversification by large Chinese steel producers. About 65 MTPA of steel is expected to come online if all the projects announced are sanctioned and completed. The investments enhance cost efficiency, as these operations are located closer to demand centres, and provide optimum substitutes for ageing plants in China. Southeast and South Asian countries are, therefore, expected to play a bigger role in the regional and global steel industry dynamics and witness a surge in demand, supplies, and domestic and foreign investments in the coming years.

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