VZCZCXRO2258
RR RUEHCN RUEHGH
DE RUEHBJ #8879/01 1320630
ZNR UUUUU ZZH
R 120630Z MAY 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 5101
INFO RUEHCN/AMCONSUL CHENGDU 6228
RUEHGZ/AMCONSUL GUANGZHOU 0462
RUEHGH/AMCONSUL SHANGHAI 4506
RUEHSH/AMCONSUL SHENYANG 6029
RUEHHK/AMCONSUL HONG KONG 7357
RUEHIN/AIT TAIPEI 5528
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 1045
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 008879 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EB/TPP/BTA, AND EB/IFD/OIA 
STATE PASS USTR FOR STRATFORD/MCCARTIN/KEMP 
TREASURY FOR OASIA/ISA 
USDOC FOR 5101/ITA/IA 
USDOC FOR 4220/ITA/MAC 
USDOC FOR 1003/ITA/OUS 
USDOC FOR 6310/ITA/TD/OIEM 
 
E.O. 12958:    N/A 
TAGS: ECON EIND ENRG ELAB SENV WTRO CH
SUBJECT:  STEEL CHINESE GOVERNMENT RESEARCHERS, STATE-OWNED 
ENTERPRISE EXECUTIVE DISCUSS STEEL POLICY ISSUES 
 
REF:  (A) 05 BEIJING  18221 
 
     (B)  BEIJING  08615 
 
¶1. (SBU) Summary:  Chinese steel industry analysts and insiders 
consistently point to China's private steel mills as the target of 
the Central Government's call for reductions in domestic steel 
production capacity.  Beijing will use environmental protection 
and energy conservation laws and regulations as its primary tools 
in this effort.  At the same time, Beijing is promoting the 
consolidation and technological advancement of its larger state- 
owned steel mills in a bid to create internationally competitive 
steel mills.  The most 
significant roadblock to the reduction in capacity will be 
Beijing's need to coordinate its actions with local governments 
bent on preserving local tax revenue and jobs, according to local 
steel experts.  China's continued growth in demand for steel also 
will complicate efforts to eliminate low-quality production. 
Beijing's mounting concern about broader industrial overcapacity 
ensures that the steel policy and issues relating to it will not 
fade 
away anytime soon.  End Summary. 
 
Sinosteel Executive Comments On Steel Industry History, Steel 
Policy 
--------------------------------------------- --------------------- 
-- 
 
¶2. (SBU) Vice President of Sinosteel Corporation, Dong Zhixiong, 
commenting on the National Development and Reform Commission's 
(NDRC) 2005 Steel Policy, said that the national policy is 
centered around a philosophy of transitioning China from being a 
large steel making country to that of a strong steel making one. 
China must contain the growth of its steel industry if it is to 
accomplish this goal.  Dong said that between 2000-2005 China 
invested some USD 85 billion in its steel sector.  China in 1996 
exceeded 100 million metric tons of annual production for the 
first time in its history.  It took China another seven years to 
add an additional 100 million metric tons of annual production, 
but by the end 2004, China already had added yet another 100 
million metric tons of 
production.  China produced some 340 million metric tons of steel 
in 2005, accounting for around 30 percent of the world's total 
steel production, and in 2006 will add still another 40 million 
metric tons of production capacity.  Vice President Dong said that 
the most serious difficulty in implementing the steel policy will 
be the lack of coordination between Beijing and local level 
governments.   The NDRC is preparing a list of outdated steel 
producers that will be targeted for elimination, but coordination 
and cooperation with local authorities will be necessary to 
achieve the closures.  (Note: For previous Post 
reporting on China's steel policy, please see Ref (A). End Note.) 
 
¶3. (SBU) Vice President Dong said China must contain the rapid 
growth in the steel industry if it is to achieve the desired 
reform advocated in the steel policy.  China has some 100 million 
metric tons of outdated and inefficient steel production that must 
be eliminated.   Dong  said that there are three primary elements 
to the steel policy.  First, China needs to change its steel 
output to focus on value-added products rather than on gross 
production.  Second, China must consolidate its steel sector 
through a strengthening of the integration of its steel mills. 
The country currently has more than 800 steel mills, with the 15 
largest mills only accounting for around 45 percent of China's 
total steel production.  China's goal is for its top ten largest 
mills to account for some 50 percent of total production by 2010, 
and by 2020, aspires to have its top ten steel mills accounting 
for some 70 percent of total production.  Third and finally, China 
wants to reduce the industry's annual energy consumption and 
environmental degradation resulting from steel 
production. 
 
Development Research Center Official Weighs In On Steel Policy 
Issues 
 
BEIJING 00008879  002 OF 003 
 
 
--------------------------------------------- --------------------- 
--- 
 
¶4. (SBU) Yang Jianlong, Senior Research Associate at the 
Industrial Economics Research Department of the State Council's 
Development Research Center, said the Central Government enacted 
the steel policy to remedy the trend of local and provincial 
governments promoting small-scale steel mill projects, including 
those involving private investment, without adhering to Central 
Government standards.  Yang acknowledged that during 2003 and 2004 
these types of small-to-medium sized steel enterprises helped 
China to meet its high construction sector-led demand for iron and 
steel.  The enterprises, however, concomitantly caused problems, 
most notably environmental damage, disproportionately high energy 
usage, and production of only one type of steel product. The 
Central Government wants to discourage the further establishment 
of these types of 
enterprises and to discourage enterprises lacking steel-making 
experience from entering the market. 
 
¶5. (SBU) Yang said the steel policy is intended to promote 
industry consolidation, along with the growth of the higher 
technical standards and production skills necessary to compete 
with major international steel industries.  Rather than simply 
shutting down enterprises, Beijing and local governments will look 
to market competition and relevant laws and regulations to foster 
the needed consolidation of the industry.   The Central 
Government, for its part, will aid consolidation through the 
setting of higher environmental and technological standards for 
new and existing steel enterprises.   These 
standards will be reflected in the Natural Resources Savings Law 
that is currently being drafted and through amendments in the 
Environmental Protection Law.  Yang suggested that the 
environmental law amendments in particular would require many 
small steel enterprises to quickly invest in expensive 
environmental technology to the point that many would be forced to 
withdraw from the market. 
 
CASS Researcher Notes Private Mills The Overcapacity Problem 
--------------------------------------------- --------------- 
 
¶6. (SBU) Dr. Lu Tie, Professor, Institute of Industrial Economics 
at the Chinese 
Academy of Social Sciences (CASS),  said that China as of April 
2006 has some 470 million metric tons of steel production 
capacity.   China must still import some high-end steel products, 
despite this production capacity.   Dr. Lu stated that this is 
clear evidence that the Chinese Government must simultaneously 
take steps to eliminate backward steel production and raise the 
technical standards of the remaining steel enterprises.  The 
Central Government must carefully consider local political 
concerns, particularly the loss of tax revenue and jobs in the 
local economy, while undertaking this reform. 
 
¶7. (SBU)  Dr. Lu stated that entry-level steel production 
technology during the past ten years hs progressed rapidly, 
facilitating the start up of many private steel enterprises in 
China.  These recent entrants into the Chinese steel market are 
largely making low-end products, primarily for the construction 
sector.  Dr. Lu noted that private steel enterprises currently 
account for around 100 million metric tons of steel production in 
China.  These enterprises have a cost advantage over SOE's because 
they employ low-wage migrant workers to whom they do not provide 
social services such as health insurance.  The private steel 
enterprises have also largely avoided investing in costly 
environmental 
protection technology and equipment.   Dr. Lu stated that 
conversely, SOE steel mills are attempting to retool their 
production processes to produce increasingly complicated steel 
products and to respond to Central Government calls for increased 
investment in environmental protection and energy conservation 
technologies. 
 
 
BEIJING 00008879  003 OF 003 
 
 
CISA Backs CASS Assessment Of Overcapacity 
------------------------------------------ 
 
¶8. (SBU) Yang Zunqing, Deputy Secretary-General of the China Iron 
and Steel 
Association (CISA),  stated that the Chinese steel industry is 
currently in a situation where it has too little high-value 
production capacity while carrying overcapacity in low-value 
production capacity.  CISA's position is that the Chinese steel 
industry must do a much better job of coordinating and organizing 
its product pattern to alleviate this problem.   Yang noted that 
some 700 private or partially stated-owned steel mills are members 
of CISA compared to only around 100 wholly-owned SOEs.  Despite 
representing only about 12 percent of CISA's rolls, the SOE's 
account for almost 60 percent of China's steel making capacity. 
Yang went on to note that based upon a metric of production 
quality, environmental protection efforts, and energy consumption, 
a high percentage of China's backward steel production capacity is 
in its private steel mills. 
Some sixty percent of China's steel production capacity is located 
in northeast China, according to Yang.  A large percentage of 
these mills are situated in or near large cities, and many are in 
areas where there are water shortages.   Yang stated that the 
policy-mandated reorganization of the Chinese steel industry must 
also lead to a rectification of this geographical problem as well. 
 
Comment: Small, Private Steel Mills Beware, Many Want To Shut You 
Down 
--------------------------------------------- --------------------- 
---- 
 
¶9.  (SBU)  The Chinese Government  is very concerned about 
industrial overcapacity as evidenced by recent articles relating 
to this problem in the local and English language press. 
Environmental protection and energy conservation measures appear 
to the most robust tools available to Beijing at present to 
address this problem.  Steps such as charging varying electricity 
rates to enterprises in energy-intensive industries, including the 
steel sector, based upon a NDRC determination whether a particular 
enterprise is classified as encouraged, permitted, restricted, or 
eliminated, are currently underway. 
The NDRC, in its November 2005 circular implementing this 
practice, stated that it is a macro-economic control combining 
price and industrial policy that has already been proven to 
restrict excess development of energy-intensive industries. 
 
¶10. (SBU) CISA, CASS, and other local observers consistently imply 
that the 100 million metric tons of excess capacity identified in 
the steel policy resides in small, private mills, and these 
enterprises should bear the brunt of the NDRC's macro-economic 
control measures.  It is unclear whether the Central Government's 
policies will actually remove this production capacity in the face 
of  forecasts that China's steel demand will continue to grow'CISA 
estimates by 10-13 percent in 2006'in the foreseeable future.  It 
is increasingly apparent based upon local and English language 
press reports, along with recent Econoff visits to steel 
enterprises in Hebei Province (Reftel B), that the mandated 
consolidation of SOE steel enterprises is underway, and that 
Beijing intends for these new conglomerates to compete 
internationally both in terms of gross output and in the 
technology employed to produce their products.  China's 
considerable challenge moving forward in implementing its steel 
policy will be to balance this consolidation and technological 
upgrade of its state-owned steel enterprises, while simultaneously 
meeting double-digit increases in steel demand and fulfilling its 
stated intent to remove excess steel production capacity. 
 
RANDT