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Northern China eyeing move away from steel production

China's northern provinces, including the country's top steel-producing province of Hebei, are seeking to reduce their exposure to crude steel production in a bid to lure more high-value-added businesses to their respective economies, said Wang Guoqing, head of the Beijing-based Lange Steel Information Research Center.

"This is in line with the central government's priority to transform and upgrade the economy. Local governments, especially in top steel-producing provinces, are looking to restructure their industrial mix based on their respective conditions," Wang said in an interview with S&P Global Market Intelligence, referring to the major steel manufacturing provinces of China, such as Hebei, Shandong, Liaoning and Shanxi.

Zhao Kezhi, Hebei's party secretary, spoke on the sidelines of China's National People's Congress and said the province will continue to reduce its reliance on the steel industry, according to a March 7 report from Southern Metropolis Daily.

Zhao expected the equipment manufacturing sector to replace the steel sector as Hebei's "pillar" industry, with steel sector's contribution to Hebei's total industrial output value to drop to 25% from its peak level of 36.5% and the equipment manufacturing sector's contribution to increase to about 27% this year. Zhao did not disclose when the peak level was recorded.

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Hebei has been working on such a shift for years, during which it introduced manufacturers such as Sany Heavy Industry Co. Ltd., which is China's largest construction equipment group, to set up plants, according to Wang.

"These manufacturers are usually major clients of the steel mills in Hebei, so the provincial government is seeking to attract manufacturers to the region to enhance value," Wang said.

An analyst specializing in the mechanical manufacturing industry, who asked not to be named, told S&P that the equipment manufacturing sector has been developing rapidly in China's northern provinces, including Hebei, Liaoning and Shandong.

"Equipment manufacturing is a steel-consuming industry, so Hebei has the leverage to establish a more diversified industrial system in the area," the analyst said. Investments from the equipment manufacturing sector totaled 1.86 trillion Chinese yuan from 2011 to 2015 in Hebei, representing over 30% of the province's combined industrial investments in the period.

The analyst expected Hebei to develop into a major manufacturing center for a range of equipment, covering railway construction, ocean engineering and automobile by 2020, quoting a five-year industry upgrade target released by the Hebei provincial government in 2016.

Meanwhile, an integration strategy aimed at establishing a new economic zone among Hebei and the cities of Beijing and Tianjin will also benefit from the growth in manufacturing industry in the region, the analyst said.

Along with Hebei's plan to develop into a regional manufacturing center, Wang expected that the province's crude steel output would probably drop in the next few years and that low-efficiency steel mills may leave the region.

"It is possible that the crude steel output in Hebei will drop due to the industry upgrade initiative, but the actual production will also be subject to market demand and profitability."

"More importantly, there is not much room left for growth in the steel industry in Hebei, and the development of the Beijing-Tianjin-Hebei region will also require steel mills to move away from the greater capital region for environmental purpose," Wang said.

Wang added that capacity cuts and tightening environment regulations have also placed additional pressure on steelmakers in China's northern provinces. Earlier this year, the Chinese central government reportedly required steel producers in the four northern provinces of Hebei, Shanxi, Shandong and Henan to halve output in the winter season as part of its war on smog.

China's steel producers are traditionally located in the northern part of the country, whereas the country's leading economic regions and manufacturing centers are in the south, but the situation has been changing, according to Wang

"The plan among northern provinces to reduce its reliance on steel parallels that of domestic steel producers to relocate their mills to southern China, which will eventually reduce the number of steel mills in the north," Wang said. "While steel producers are trying to reduce costs, northern governments are seeking to retain more value in their provinces."

Steelmakers that have relocated their production to China's southern provinces include Baoshan Iron & Steel Co. Ltd., which is ramping up production at two under-construction steel plants in Guangdong and Guangxi that were acquired through its takeover of Wuhan Iron & Steel Co. Ltd.

As of March 15, US$1 was equivalent to 6.91 Chinese yuan.