【普氏內部報告】穹頂之下，鋼鐵行業的罪與罰，怕與愛

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原文鏈接：【普氏內部報告】穹頂之下，鋼鐵行業的罪與罰，怕與愛

China』s steel companies』 joys and sorrows with the new

environmental protection law

——普氏能源資訊獨家授權撲克投資家，英文首發

[另外也請英語不錯的小夥伴儘快聯繫我(微信Jackie_suns)，撲克需要翻譯志願者]

With China』s implementation of the new Environmental Protection Law this year, industry participants have been watching for signs Chinese steel mills are struggling with tough environmental constraints. Of particular interest is the impact on highlypolluting sinter operations and the consequent impact on quality demand. Will steel mills switch from sinter fines to more lump and pellet to abate pollution, despite their extensive sinter capacities? Also of concern to the market, is the potentially large capital expenditure required by steel mills for treating emissions. Will this lead to the widespread shuttering of mills and industry consolidation? And if so, to what extent? Who will be the last ones standing? In this research note, MVS examines how the new legislation is enforced, how mills are impacted differently depending on their size and location, and possible demand shifts.

China』s new environmental protection law is the most stringent ever – limitless penalties can be imposed on steel makers

China』s economic reform led to its historic record-high speed of development, but at the cost of its most devastating environmental impact in history.During a recent National People』s Congress (NPC) convention, President Xi Jinping emphasized that there shall be no leniency or leeway for any conduct harming ecology or the natural environment. When presenting the government work report, Premier Li Keqiang once again committed to a hardline approach in managing China』s environmental pollution, and set out the anti-pollution objectives for 2015. These include a reduction in carbon dioxide emissions by more than 3.1%, a reduction in chemical oxygen demand (COD) and total ammonia nitrogen (TAN) by about 2%, and a reduction in sulphur dioxide and nitrogen oxides by about 3% and 5% respectively. On 24 April 2014, the amended Environmental Protection Law was passed by the NPC, which came into effect on 1 January 2015. This version of the Environmental Protection Law is deemed to be the most stringent ever. The amended Environmental Protection Law has seven chapters and seventy articles in total. Compared to the pre-amendment version of six chapters and forty-seven articles, it includes many changes which can be summarized as follows:

Collectively, these mean that many more entities – governmental or otherwise – are able and/or made responsible for establishing and implementing pollution control measures. Harsher and limitless penalties can be imposed on steelmakers should standards not be met.

As expected, environmental protection costs are rising

Information from the Ministry of Industry and Information Technology (MIIT) shows that the new law and emissions standards implemented since 2015 require SO2 emissions in sintering fumes to be under 200 mg/m3. This is thrice as stringent as the previous standard, and a significant number of steel enterprises do not meet this requirement. It costs at least RMB 200 million (US$ 32 million) for a steel plant to install a desulphurization unit, and RMB 50 million (US$ 8 million) for the technical transformation. To meet emission standards, a 13% increase in investment is needed for every metric tonne of steel output, along with an additional RMB 200 (per tonne) operating expenses. However, steel supply far exceeds market demand, and it will therefore be very difficult to transfer these additional environmental protection costs downstream. Perhaps the only possibility is for steel enterprises to absorb these costs themselves, which will lead to increased costs for steel mills. It is still too early to reliably estimate detailed quantifiable costs to mills and effects on margins due the new environmental law.

Although costs will rise, the view of the medium-to-large mills surveyed is that they could benefit from these changes

Differential environmental protection costs – as smaller steelmakers have generally lower environmental regard - have all along caused unequal competition among steelmakers. As the new environmental law promotes fair play between companies, 90% of large steel enterprises consider the new environmental law to be beneficial for medium-to-large steel enterprises.

Compellingly, MVS surveys revealed that new law has a relatively small impact on more than 80% of medium to large enterprises, them being well equipped with environmental protection facilities. Their costs have increased just slightly, mainly from upgrading, maintenance and depreciation of existing equipment. Small private steelmakers are markedly lagging behind their larger peers in terms of environmental protection facilities, and face tremendous cost pressures under the new law. MVS sees this as accelerating the shuttering of such substandard steelmaking capacity to the benefit of larger steelmakers』 market share.

Enforcement disparities will lead to regionally differentiated environmental protection costs

MVS survey data shows 90% of steel companies believe that local administrations enforce the new law to different degrees, resulting in differentiated violation costs. For example, enforcement in Eastern regions such as Beijing, Tianjin and Hebei Province will be tighter than in remote Northwest and Southwest regions. This is because the former has the most severe pollution and highest concentration of steel companies. These variations in the cost of violations lead to differentiated impacts on overall production costs, inadvertently undermining equal grounds for market competition. Take for example the leading steel producing province of Hebei - with 148 steel companies, 410 blast furnaces, 338 converters and 37 electric furnaces, and a total steel production capacity of 290 million mt – accounting for a quarter of national steel output. In April this year, the Hebei administration released its local atmospheric pollutant emission standards for industries, including the steelmaking sector. Using the national standards』 special emission limits as a reference, Hebei specified the new emission limits on atmospheric pollutants for its steel sector, some being more stringent than the national standards. For instance, the national limit for SO2 from sintering and pelletizing machines is 200 mg/m3, but 160 mg/m3 in Hebei. It can be said that the high provincial concentration of steelmaking necessitated the more severe restrictions for Hebei to attain national emission standards.

Medium-to-Large steel companies do not expect to adjust their current procurement strategies

100% of the medium-to-large steel companies surveyed by MVS noted the new environmental law will not have any impact on their ore procurement strategies. With the six-year low in iron ore prices, ore fines used by steel companies are already medium to high grade. Since the cost of pellet and lump ore is significantly higher than that of sinter ore, steel companies are therefore not considering replacing sinter with pellet or lump.

Long-term support for steel companies』 profits

The new environmental law will force out some excess steelmaking capacity - precisely one of the government』s objectives in restructuring the sector. Just recently, the MIIT expedited for the release of Action Plan for the Transformational Development of the Steel Industry (2015-2017), which is expected to be issued before June. It is understood that the Action Plan』s objective is to reduce steel production capacity by 80 million mt over 3 years in order to reduce overcapacity and steel supply.

As such, steel companies』 profits will decrease in the short term, while steel prices and steelmakers』 profit margins will be somewhat bolstered in the long term.

The market』s ultimate concern is about demand versus supply. Even though the new environmental law will have some inhibiting effects on the supply side, overcapacity in China』s steel sector is severe, with supply far exceeding demand to an estimated level of about 300 million mt. Insufficient demand is therefore the most pertinent concern for steel companies presently.

Substandard capacity phased out, with industry consolidation

According to statistics from the China Iron and Steel Industry Association (CISA), private steel companies represent over 80% (400 out of 500) of Chinese steelmakers, but only account for 50% of total national steel output. Small steel companies with a crude steel capacity under 1 million mt numbering about half of private steel companies (200+ out of 400+) have small-scale assets and high financial stresses; the new environmental law may be the death knell for the already dwindling small private steel companies. The aforementioned Action Plan』s target reduction of 80 million mt capacity is far less than the current oversupply. Moreover, medium-to-large enterprises will not have to reduce their capacities as they are already well-equipped with environmental protection facilities and will hardly be impacted.

In the long term, total capacity in the industry will be optimized and most capacity will be consolidated in the hands of a few major steel companies.

DISCLAIMER

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