China Economic Review

Dispatches from the frontlines of China’s “war on pollution”

Ever since Chinese Premier Li Keqiang declared a “war on pollution” in 2014, China’s drive to tighten environmental regulations has shown no sign of abating.

Just last month, the Chinese government launched some of the boldest reforms seen since the start of the opening-up era in 1978 at the “Two Sessions,” the annual meeting of China’s top political and advisory bodies in Beijing. Sustainable development was at the center of these changes, with the newly revamped Ministry of Ecology and Environment handed a mandate to extend its oversight of pollution into several new sectors, including agriculture.

The government has also been conducting a massive nationwide campaign to quantify key sources of pollution, which is scheduled to be completed in 2019. It also recently announced a new round of environmental taxes for manufacturing firms that will continue to put upward pressure on prices.

For analysts, the key question is: How will all this tightening regulation affect China’s industrial and manufacturing sectors, which drive a third of China’s GDP?

At CAMAL Group, we have witnessed the impact of these changes up close in three main sectors: steel, industrial chemical and manufacturing.

China’s drive to curb pollution has expanded to many areas of society (Photo: CAMAL Group)

Steel in the crosshairs

China has been very clear in its drive to curb steel output, a drive that will no doubt be amplified by the ongoing “trade war” with the United States. China’s drive to cut between 100 and 150 million tons of steel capacity continues to have a big impact, not only in steel prices, but also in downstream industries, particularly manufacturing.

Whereas steel prices had leveled slightly earlier this year before culminating in their biggest dip early April, this was mainly due to internal industry corrections and prices were down no more than a couple of weeks.

Some have argued that China is rolling back its regulations due to the greater-than-expected slowdown in industry. While this may be true in some local jurisdictions, the overarching trend remains the same. One has only to visit China’s steel belts, especially private mills, to appreciate the impact of new regulation.

In Tangshan—the world’s top steel making city, which for decades has been a byword for cheap steel and smog-choked skies—there has been a marked drop in steel suppliers as factories have shut down. Although steel production remains a crucial component part of the city’s GDP, it will never return to the production levels seen before 2014.

The local government in Tangshan seems to have come to terms with this fact, and is now focused on encouraging green industries, such as new-energy products.

Many smaller and private steel mills now at a standstill due to new environmental regulations. (Photo: CAMAL Group)

Chemicals feel double regulatory pinch

The chemicals industry has been facing headwinds from two sources. Not only has the sector faced pressure to cut down on pollution, but the authorities are also taking it to task on its lax safety record.

As such, factories have been forced to close or update their technology in order to meet new pollution and safety requirements. The result has been that a plethora of suppliers for products such as sodium cyanide, hydrogen peroxide and various sulphates have all closed shop as they are unable to meet the new requirements.

For larger companies, consolidation remains an increasingly attractive option in an industry counting over 30,000 companies. The short-term result has been price increases and loss of market share to countries such as India, Malaysia and even Russia.

Light manufacturing also under pressure

We recently required LPG tanks manufactured and had reached an agreement with a reputable supplier from Hangzhou. However, despite the supplier’s competitive pricing and quality products, the supplier was unable to deliver due to restrictions on spray painting in the city of Hangzhou.

Such restrictions have meant that coastal suppliers are facing challenges from suppliers in China’s interior. Moreover, delays or non-delivery due to environmental restrictions on when, how much and where painting can occur have become frequent, particularly in the coastal cities.

The heavy industries have not been spared either. I recently visited our regular supplier of crushing equipment only to find the whole factory at a standstill until officials complete an environmental audit. When production was allowed to proceed, it could only happen during the night.

A factory for crushing equipment stands idle as a note on the factory doors indicates a pending audit. (Photo: CAMAL Group)

What next?

China has already made its decision with regards to the environment and has stressed that its policies will be implemented. With thousands already in custody due to environmental pollution-related crimes, the message is loud and clear.

One cannot understate the immense task that lies ahead, but it seems China is already past the point of no return to the old days where pollution was allowed to run unchecked. After decades of wanton pollution, the task of preventing further emissions is only one part of the problem—a larger part is cleaning up the existing pollution.

For instance, it has been estimated by China’s environment ministry that the number of pollution sources has increased by 50% since 2010. One reason for the increase is simply that better data is now available, but this underscores the scale of the challenge facing the government.

Some powerful firms may also continue to side-step new regulations and local officials retain incentives to look the other way vis-à-vis polluting industries due to their contribution to GDP and employment. As the old adage goes, the mountains are high and the emperor is far away.

China’s regulation will not kill its manufacturing, but it will definitely eliminate certain types of industries and reduce China’s competitiveness in the same sectors. This situation is not entirely in conflict with China’s own goal of moving up the manufacturing value chain as espoused in its Made in China 2025 plan.

Companies that have technologies to combat pollution—especially related to natural gas, the government’s key alternative to coal—will witness unprecedented opportunities.

For those industries facing upward pressure on prices, they will be forced at best to implement new technologies, shift to interior provinces or simply shutdown or relocate overseas.

 

Walter Ruigu is Managing Director of CAMAL Group, a trade and investment advisory firm based in Beijing, Nairobi and Lusaka. He can be reached at walter@camaltd.com.