The Development and Reflections on China's Steel Industry

　　Zhang Guobao—former vice chairman of the National Development and Reform Commission, chairman of the Expert Committee of the National Energy Administration

　　Zhang Guobao once oversaw industry and participated in the decision-making, approval, and acceptance of many major steel projects. He devoted a lot of effort to promoting the domestic production of major steel equipment. Many major steel projects were constructed during this period, and he was a witness to many of them, forging a deep connection with the steel industry.

　　As a firsthand witness, Zhang Guobao recounted the stories behind the construction of Baosteel's second and third phases, the relocation of Shougang, the Ansteel West District and Bayuquan steel projects, the Maanshan Iron & Steel new district, the Handan Iron & Steel new district, Taigang Stainless Steel, Jiuquan Iron & Steel Group Stainless Steel, Baotou Steel, Panzhihua Iron & Steel, Northeast Special Steel, and Baosteel's reorganization of Guangdong's steel industry, as well as the decision-making behind the Baosteel Zhanjiang and Wuhan Iron and Steel Fangchenggang projects, and the little-known stories behind the promotion of domestic equipment. He also offered in-depth insights and reflections on major issues such as structural adjustment, innovation-driven development, resolving overcapacity, and "going global" in China's steel industry.

　　This article is excerpted from: China Metallurgical News, August 27, 2015, page 1.

　　Looking back at the development of China's steel industry since the 1990s, the rapid growth is evident from the crude steel output alone: in 1996, annual crude steel output exceeded 100 million tons; in 2003, it exceeded 200 million tons; and thereafter, it increased by about 100 million tons every two years, reaching 823 million tons in 2014. In the history of steel industry development, only the United States, the former Soviet Union, and Japan have achieved annual production exceeding 100 million tons, but none reached 200 million tons. While experiencing rapid development, China's steel industry is also facing a series of major challenges, including severe overcapacity. I have participated in the decision-making and approval of several steel-related projects and have deep feelings for China's steel industry. I believe that reviewing the development history of China's steel industry reveals many significant issues worthy of serious consideration.

 

The Rise of a Great Power: The Indispensable Role of the Steel Industry

 

　　Although in recent years, emerging industries such as the internet and the virtual economy have developed rapidly, becoming sunrise industries, while traditional industries such as steel seem to have become sunset industries, steel, like food, does not become dispensable due to the development of emerging industries. On the contrary, steel and food, while not emerging industries, are evergreen industries, indispensable at any time. Steel remains the most important basic raw material in the development of the national economy. China's steel industry has made a tremendous contribution to supporting the rapid development of the national economy.

　　Since the founding of the People's Republic of China, and especially since the reform and opening up, China's industry has continued to develop rapidly, building a complete and independent industrial system with a full range of categories. Undoubtedly, China has become a manufacturing powerhouse, which has strongly promoted the process of industrialization and modernization, significantly enhanced its comprehensive national strength, and supported its status as a major world power. It must be acknowledged that the steel industry has played an indispensable role in China's rise as a manufacturing powerhouse, providing significant support and impetus to the national defense industry, petroleum industry, shipbuilding industry, construction industry, and equipment manufacturing industry.

　　Without the support of the steel industry, China's shipbuilding industry could not have achieved such a large share in the global market.

　　In 2003, I submitted a report to central leaders, suggesting that China should be built into the world's number one shipbuilding nation. In 2010, China's shipbuilding completion volume reached 65.6 million deadweight tons, accounting for 43.6% of the world's shipbuilding market completion volume, ranking first globally. In 1975, China and South Korea each accounted for only 1% of the global market share, while Japan accounted for 50% and Europe for 43%.

　　Of course, in terms of technological content, China's shipbuilding industry still lags behind South Korea. However, if calculated using corrected gross tonnage based on technological content, China has now surpassed South Korea, driving a significant increase in steel consumption. Without China's strong shipbuilding capacity, aircraft carriers and guided missile destroyers would be unthinkable. All of this is inseparable from the steel industry.

　　It is understood that in the first 15 years of the 21st century, China produced approximately 7 billion tons of steel. Without this 7 billion tons of steel, how could the numerous high-rise buildings, crisscrossing railways, and expressways have been built? Steel, like strong bones, powerfully supported China's rise.

　　One of Chairman Mao Zedong's important dreams for a strong nation was to build a powerful steel industry. During that period, slogans such as "Steel as the Leading Factor," "The Steel Marshal Takes Command," and the "Anshan Constitution" were put forward. The main content of the "Great Leap Forward" in 1958 was to strive for an annual steel output of 10.7 million tons, launching a nationwide mass steel-making movement. In this process, due to failure to follow economic laws, significant losses were also incurred.

　　Why did Chairman Mao attach so much importance to the steel industry? Because steel is the foundation of industrialization and the foundation for realizing the dream of a strong Chinese nation. China suffered humiliation in modern history, and a major reason was our backward science and technology and the lack of modern industry. After the Opium War, enlightened people launched the Self-Strengthening Movement, and Zhang Zhidong established the Hanyang Ironworks, establishing a very weak steel industry. During the eight years of the War of Resistance Against Japan, Japan's annual steel output averaged more than 5 million tons, while China's averaged only about 5,000 tons—Japan's steel output was about 1,000 times that of China. Coupled with its already strong machinery processing capabilities, it could produce aircraft carriers and Zero fighters. The Chinese people fought the Japanese aggressors with their flesh and blood because China's weapons, ammunition, and material conditions were simply no match for Japan's. Therefore, Chairman Mao's emphasis on developing the steel industry at that time was justified. In 1949, when the People's Republic of China was founded, China only had 158,000 tons of steel; in 1958, our slogan was 10.7 million tons of steel. I was still in middle school at that time and also participated in the mass steel-making movement, building small blast furnaces and refractory brick factories. The scars from iron ore hitting my hands while hammering it are still there. But even with the "smashing pots and selling iron" efforts of 1958, the 10.7 million-ton target was not reached; it was only achieved in 1959, reaching 13 million tons, some of which were from small blast furnaces and were substandard products. For the next 20 years, the steel industry developed slowly. Before the construction of Baosteel, the national steel output was less than 30 million tons. Through reform and opening up, with the construction and commissioning of Baosteel, the quality and quantity of China's steel industry rapidly improved. The level of equipment technology took a big leap forward, growing into the world's number one producer. The steel industry has continuously adjusted and progressed with the changing times.

 

The Construction of Baosteel: A Milestone in China's Steel Industry

 

　　After the reform and opening up, the biggest event in China's steel industry was the construction of Baosteel. It can be said that the completion and commissioning of Baosteel not only elevated China's steel industry but also the comprehensive strength of its industry as a whole.

　　I once served as the director of the National Acceptance Committee for the Baosteel Phase III project. Baosteel was built over 22 years, starting construction in 1978, with a period of suspension before resuming construction, divided into three phases. The final settlement for the third phase was 62 billion yuan, the largest industrial investment project in China since its founding.

　　I have always believed that the construction of Baosteel holds milestone significance in China's modernization, and the process was far from easy. In the 1980s, when Baosteel's construction was suspended, Japanese equipment suppliers demanded compensation from China. Chinese enterprises felt that the Japanese company's demand for compensation was not friendly, so when Baosteel resumed construction, they "reprimanded" Japan, re-ordering the 2050mm hot rolling mill from German equipment, costing approximately US\$400 million—a substantial order. Later, Japan sent a large delegation to Beijing to discuss the matter. As I speak Japanese, I served as an interpreter for Zhao Dongwan, the vice director of the State Planning Commission who was responsible for this project. The Japanese side apologized and requested another opportunity. We compiled a report summarizing the situation and submitted it to the central government, considering that Japan's Nippon Steel had previously assisted China in the construction of Baosteel. After comprehensive consideration, the central government ordered the 1900mm slab continuous casting machine from Kobe Steel of Japan, while the 2050mm hot rolling mill and 2030mm cold rolling mill were sourced from Germany.

　　The construction of Baosteel provided an excellent supporting project for the domestic production of steel equipment in China. In the first phase of Baosteel, almost all core equipment was imported, with only about 12% of the peripheral structural components being domestically produced. In the second phase, this shifted to cooperative manufacturing, significantly increasing the domestic production rate. By the third phase, the equipment domestic production rate reached 80%. With the experience gained from Baosteel, subsequent projects such as the transformation of Baogang, Pangang, and the construction of Caofeidian, China's steel equipment has essentially achieved domestic production. The overall level of the steel industry has caught up with international advanced levels.

 

Equipment upgrades propel China's steel industry to catch up

 

　　China's steel equipment is constantly improving. In the 1970s and 1980s, the typical image of a steel worker was someone wearing a flat cap, wielding a large iron chisel, and wearing safety glasses while operating in front of an open-hearth furnace, with sparks flying everywhere—a scene perceived as glorious. In fact, these were outdated open-hearth furnaces, with harsh working conditions, high energy consumption, low efficiency, and poor quality. During my tenure as Vice Minister of the National Development and Reform Commission, many open-hearth furnaces still existed. The former Ministry of Metallurgy proposed the elimination of outdated equipment, which we actively promoted. Open-hearth furnaces, blast furnaces under 300 cubic meters, and converters under 30 tons have been gradually phased out, replaced by blast furnaces of 4000 or even 5000 cubic meters, slab continuous casting and rolling, and refining furnaces—equipment that meets world-advanced levels. In the early days of reform and opening up, China could not even produce small slab continuous casting machines and needed to import equipment and technology from abroad. Mining equipment was also extremely backward, with the largest capable of producing only 4-cubic-meter excavators, and electric wheel vehicles could not be produced. Now, 56-cubic-meter large power shovels and 320-ton electric wheel vehicles have been produced. Among the twelve major sets of equipment included in the State Council's major equipment office's technological攻关in the 1980s, half were related to the steel industry: one was the complete set of Baosteel equipment, including the 2050mm hot rolling mill, the 1900mm slab continuous casting machine, and the 2030mm cold rolling mill; the other was a complete set of equipment for ten-million-ton open-pit mines. I call it "half a set" because the complete set of equipment for ten-million-ton open-pit mines can also be used for coal mines and non-ferrous metal mines. The main content of the technological攻关for this equipment was 16-cubic-meter and 23-cubic-meter shovels, and 108-ton and 154-ton electric wheel vehicles.

　　Since the construction of Baosteel, China's metallurgical equipment has continuously innovated, and its manufacturing capabilities have steadily strengthened. Most of the rolling mills designed by the world's strongest metallurgical equipment design and manufacturing companies, Germany's SMS Siemag and SMS Meer, are subcontracted to Chinese companies such as the First Heavy Industry Group. We have also experimented with some advanced processes and equipment. For example, Taiyuan Jianshan Iron Mine was the first in China to adopt pipeline transportation, followed by Yunnan Dahongshan. Advanced equipment is crucial for improving the technological level of China's steel industry. It is advanced equipment that leads to increased labor productivity, significant reductions in energy and material consumption, improved product quality, and the development of advanced technologies and products. Currently, China's steel composite price index is only 60% of the 1994 level, even with significant increases in energy prices, raw material prices, and labor costs. Without advanced technology and equipment, many companies would simply not be able to survive.

 

Structural adjustment: a matter of life and death for enterprises

 

　　Regarding the structural adjustment of China's steel industry, I have experienced several major steel enterprise restructuring and construction events. Although the process was tortuous, it is worth learning from and reflecting upon.

　　Previously, China's steel industry was largely based on major cities, mainly concentrated in provincial capitals. As urban functions expanded, steel plants became one of the city's pollution sources, significantly impacting the local environment. For example, Shougang's previous location was advantageous in terms of wind and water. While Beijing's haze was not as widely concerning as it is today, water resources were already quite tight, and Shougang had a significant impact on Beijing's environment. Therefore, the state hoped for adjustments and first proposed the relocation of Shougang.

　　Shougang was one of the first enterprises in China to reach an annual steel output of ten million tons. From political, economic, and technological perspectives, it holds a significant position in the history of China's steel industry. Relocating such a long-standing steel plant from Beijing was understandably challenging. In addition, Shougang involved approximately 100,000 jobs and 2 billion yuan in tax revenue for Beijing, leading to disagreements on various aspects. I advocated for relocation, suggesting that Shougang's headquarters, research, and sales departments—non-polluting sectors—could remain in Beijing, and some equipment manufacturing could also be retained to reduce relocation difficulties. The main focus would be on relocating the more polluting aspects, such as blast furnace ironmaking and converter steelmaking. However, due to various reasons, mainly disagreements, this was shelved. Later, with Beijing's bid for the 2008 Olympics, there was a shift in understanding of environmental protection, leading to a unified consensus and a firm decision to relocate Shougang. I served as the deputy group leader of the Shougang relocation leading group. At that time, we considered Beijing's and Shougang's requirements, minimizing relocation resistance through various measures. For example, a cold rolling plant was built in Shunyi to retain some production capacity, providing employment and retaining some tax revenue. The state also provided funds to support Shougang's relocation. After Shougang moved to Caofeidian, the National Development and Reform Commission facilitated cooperation between Shougang and Tangshan Iron and Steel Company, resulting in the current Shougang Jingtang Steel Company.

　　The restructuring of Baosteel in Guangdong's steel industry was far more complex than the relocation of Shougang. Baosteel Group had long planned to establish a coastal steel base, and Guangdong Province was the fastest-growing province since the reform and opening up. Imported steel accounted for 80% of Guangdong's total steel demand, and Guangdong's leaders and local steel companies, Shaogang and Guangang, hoped to further expand production capacity. Guangang was not a major steel plant nationwide, but it had significant influence in Guangdong Province, especially in Guangzhou City. At that time, the steel industry was already experiencing overcapacity, and improving industrial concentration was imminent. If a new base was to be built in Zhanjiang, it was necessary to eliminate backward production capacity through equivalent replacement, meaning the closure of Guangang and Zhujiang Steel Plant, and the restructuring of Shaogang, with Baosteel restructuring the entire Guangdong steel industry. This was emotionally difficult for many to accept. However, restructuring was essential for development. After lengthy negotiations, Baosteel finally agreed to invest in the restructuring, with the local government responsible for personnel placement. Guangang and Zhujiang Steel's hot processing operations were completely shut down, transforming into steel trading companies. The closure of these two large steel plants, with approximately 5 million tons of capacity, along with other smaller steel capacities, totaled about 10 million tons, achieving the goal of reducing capacity for equivalent replacement required for the construction of Baosteel's Zhanjiang base.

　　While Baosteel was restructuring Guangdong's steel industry, Wuhan Iron and Steel also hoped to build a steel base on the Guangxi coast. Otherwise, being located inland, Wuhan Iron and Steel would struggle to compete with coastal steel mills, just in terms of iron ore transportation costs alone. Guangxi Province also expressed its desire to build a modern steel base. Baosteel's Zhanjiang base and Wuhan Iron and Steel's Fangchenggang base were intertwined, making it difficult to approve only one. Given concerns about overcapacity, decision-making was even more challenging. Therefore, we proposed that Wuhan Iron and Steel restructure Guangxi Steel, which involved structural adjustments in regional layout. In the past, many steel mills were built near iron ore resources; now, 80% of China's iron ore is imported, and inland steel mills have much higher transportation costs compared to coastal ones. Therefore, steel companies are all looking for new production bases along the coast. So I discussed with the leaders of Wuhan Iron and Steel and suggested phasing out some of Hubei Province's steel production capacity, while also considering adjustments to Liuzhou Steel. In terms of structural adjustment, I believe that by building new bases and eliminating small, outdated capacity, we can achieve the goal of industrial structure optimization.

　　Industrial transformation and structural adjustment are easier said than done. Eliminating outdated production capacity and reshuffling regional layouts, as a labor-intensive and industry-driving metallurgical industry, requires the resettlement of a large number of employees. For example, when Baosteel restructured Shanghai Steel, Baosteel only had 20,000 employees at the time, but it had to solve the employment problem of approximately 200,000 steel workers from Shanghai Steel's factories 1 to 10. This was an extremely difficult process. However, this step was resolutely taken. Baosteel restructured its old factories, some specializing in stainless steel, others in sheet metal, and others in wire products such as steel cord. Gradually, the old steel enterprises were thoroughly transformed, which is a very successful case.

　　Restructuring always encounters various difficulties, such as the restructuring of Hangzhou Iron and Steel. Hangzhou is a tourist city, and Hangzhou Iron and Steel is located in the Banshan District. Although Banshan is not a core tourist area, placing a steel plant there is somewhat inharmonious. Moreover, similar to Guangzhou Iron and Steel, Hangzhou Iron and Steel only has blast furnaces of around 300 cubic meters. Although its overall operating efficiency is relatively good due to real estate development and other industries, it is outdated compared to modern steel plants. At the time, we hoped that Hangzhou Iron and Steel would take over Ningbo Steel and move directly to Ningbo. Later, due to disagreements within Hangzhou Iron and Steel—they were unwilling to leave Hangzhou—the matter was delayed. However, this restructuring path must now be taken because the G20 summit will be held in Hangzhou next year, and Hangzhou Iron and Steel must be completely shut down by the end of this year.

　　Advances in steel equipment and structural adjustments have driven continuous progress in product structure and technological structure. Currently, most of China's steel products have achieved domestic production, and the technology is gradually reaching international standards. In terms of products, domestically produced products include casing for the petroleum industry, X70 and X80 steel for natural gas long-distance pipelines in the energy industry, ultra-low temperature LNG (liquefied natural gas) storage tank steel plates, and LNG carrier steel plates. Some special steel varieties, such as steel cord for automobiles, steel wire ropes for suspension bridges, and steel cables for mines and elevators, have been domestically produced, but their quality is still unstable. In terms of technology, dry quenching, blast furnace gas power generation, and the conversion of coke oven gas into natural gas have been widely applied. Some technologies are still being explored, such as COREX (melt reduction process, a non-coke ironmaking technology developed by voestalpine), and short-process steelmaking technology has not been applied as expected. Of course, China still has a certain gap with international standards in many aspects, such as high-end products and environmental protection. For example, 700℃ ultra-supercritical boiler steel for the energy industry cannot yet be domestically produced and is still under development; many steel companies also have a large gap with foreign countries in terms of energy consumption per ton of steel. In the future, the steel industry must continue to drive innovation, pursue green development, and meet new demands in terms of products and technology.

　　When discussing structural adjustments, special steel must be mentioned. The rise of special steel enterprises has played a positive role in promoting the structural adjustment of the steel industry. I have personally experienced the construction of special steel enterprises such as Panzhihua Iron and Steel, Taiyuan Iron and Steel Stainless, Northeast Special Steel, and Jiuquan Iron and Steel Stainless. For example, since China did not have a petroleum steel pipe factory at the time, the Tianjin Seamless Steel Pipe Plant was built. The process was very difficult, and due to operational problems, there were considerations to have Baosteel merge with the Tianjin Seamless Steel Pipe Plant. The first set of equipment for the Tianjin Seamless Steel Pipe Plant was imported, resulting in high financial costs and serious losses. The state provided financial funds for financial restructuring, reducing the price of domestic petroleum steel pipes by half. Although these constructions experienced setbacks and great costs, the construction of these special steel plants changed the situation where China had to import many special steel products at high prices, filling domestic gaps and promoting the overall progress of China's steel industry.

　　Industrial transformation and structural adjustment is a difficult process and will not be smooth sailing. The relocation of Shougang and the shutdown of Guangzhou Iron and Steel encountered many thorny problems and went through a painful process, involving various issues. These are the troubles of the growth of a large steel country. However, this step must be taken. As China's economy enters a new normal, China's steel industry has also entered a new normal of low growth, low prices, low efficiency, and high pressure. Currently, steel companies rely on low-price competition. The current China Steel Comprehensive Price Index is only 60% of that in 1994. In other words, after 20 years, with rising prices and labor costs, steel prices have not only not risen but have fallen. This is achieved through technological progress and economies of scale. With meager profits or even losses, companies cannot sustain themselves in the long run. Coupled with increasingly stringent environmental protection requirements, more companies will be shut down if they fail to meet environmental standards. For the steel industry, the most important aspect of the "13th Five-Year Plan" is structural adjustment, which is a matter of survival for the steel industry.

 

Resolving Overcapacity, Giving Play to the Decisive Role of the Market

 

　　For a long time, there has been much debate about whether China's steel production capacity is too much or too little, and what the appropriate capacity should be. One set of data shows that from the discovery of the American continent to the present, the United States has used approximately 10 billion tons of steel to build bridges, railways, buildings, and airports; Japan has used approximately 6 billion tons of steel since the Meiji Restoration. China has used approximately 8.5 billion tons of steel for construction from 1949 to last year. China is currently in a development stage and still needs a large amount of infrastructure construction. Based on China's land area, I believe it should also be around 10 billion tons of steel. Economies have different characteristics at different stages of development, and the issue of production capacity should be viewed dialectically. During the period of rapid economic development, the United States, the former Soviet Union, and Japan all had steel production exceeding 100 million tons; now that the period of rapid development has passed, infrastructure is complete, demand has decreased, steel production has fallen below 100 million tons, and they are also facing painful adjustments. The area around the Great Lakes, centered on Chicago, is known as the "Rust Belt" and must also undergo industrial restructuring.

　　Now, China's steel production capacity has also become excessive, and market forces will inevitably make adjustments. The market should play a decisive role in resource allocation, and the government should play a better role. Some people hope that economic development will always be stable, neither too much nor too little. This is the ideal state of a planned economy, but it is not feasible in reality. In fact, economic development is always wave-like, and I believe this truly conforms to economic laws. For example, many steel companies are now unprofitable or even losing money, so they have to shut down; to survive, they must strive for innovation and development, such as developing new products, reducing costs by all means, working on environmental protection, striving to "go global," and transforming and upgrading. In this way, China's steel industry can enter a new stage of development. After the economy enters a new normal, a decline in steel production is inevitable.

 

Going Global, Making Good Use of Two Markets

 

　　Regarding steel exports, I agree that steel billet exports should be taxed, discouraging the export of high-energy-consuming, low-grade steel products, especially low-grade billets and ferroalloys. For high-value-added finished products, such as pipes and plates, China, at its current stage of development, cannot avoid exports; this is determined by global market demand. China has become a major manufacturing country, and a large population needs employment; this is determined by national conditions. Last year, China's steel exports approached 100 million tons, and about 80 million tons of steel were also "exported" in machinery, power generation equipment, refrigerators, air conditioners, automobiles, and ships, totaling nearly 200 million tons. Japan's export proportion is higher than China's. Japan lacks energy and iron ore, but exports about 40% of its steel, while China exports about 11%. Relative to major steel-producing countries, China's export proportion is still moderate.

　　Export is about products "going global," but we must also consider the "going global" of production capacity. Previously, we focused on the domestic market, but now we are gradually adjusting to a structure that balances "bringing in" and "going global." In recent years, China's foreign investment has included the Channar iron mine in Australia, followed by investments in Peruvian and Brazilian iron mines. Last year, China imported 930 million tons of iron ore, with an import dependency of about 80%; "going global" investment is also an objective need.

　　Currently, China's steel industry has serious overcapacity. The effective approaches to resolving overcapacity, including the "four batches" approach, also mention "going global" to transfer a batch. The Belt and Road Initiative brings tremendous opportunities for steel to "go global" at a higher level. The Belt and Road Initiative is now a national strategy, with global participation, involving about 60% of the world's population and more than 60 countries. In promoting the Belt and Road Initiative, we are both a community of interests and a community of destiny, and steel companies have much to contribute. For example, some Chinese industrial projects want to relocate to Kazakhstan, some of which are steel-related, and Kazakhstan is very supportive. Previously, Jiuquan Iron and Steel Company wanted to cooperate with Kazakhstan because they have iron ore for sustainable supply. Due to various reasons, the cooperation did not materialize at the time. Now, leveraging the national Belt and Road Initiative strategy, we can consider friendly cooperation. Indonesia is also a hot investment destination. Its steel industry is small, but its demand potential is huge. Recently, Indonesia has proactively sought cooperation with us because Indonesia has abundant sea sand magnetite, but its domestic steel and metallurgical enterprises are limited, so it hopes to cooperate with us to build steel-related projects locally. I believe this is beneficial to both sides. I have discussed this with the Ministry of Foreign Affairs, and it is now gradually progressing.

　　I believe that steel has become one of China's most competitive industries globally. Therefore, we have the strength to go international, integrate globally, utilize both domestic and international markets, and allocate both domestic and international resources effectively to promote structural adjustments. At the same time, we must focus on innovation-driven development, paying attention to detail to reduce costs and increase efficiency, achieve sustainable development, and promote the transformation and upgrading of China's steel industry.