• Luis Andre Talavera Nunez

CONTEMPORARY ECONOMIC ANALYSIS

An analysis of Peter Cai’s article: “Iron ore the victim in Beijing’s smog crackdown in the Business” Published the 26^th of February – 2015 in the website businessspectator.com.au

EXECUTIVE SUMMARY

Peter Cai’s article analyses the economic impact of the pollution produced by the steel factories in China and their repercussion in the steel market and the iron ore prices.

The article takes as an example the city of Hebei, one of the most important steel producer centres of China, which suffers one of the most critical pollution levels of its history. The province’s strategic location close to Beijing, the Chinese capital is a contributor factor to the increment of smog in the metropolitan area. The social pressure that arises from this issue is forcing the government to take drastic decisions with potential socio-economic impacts.

New environmental standards were created in order to regulate the emissions. The new policies have the power to shut down any factory that does not meet the minimum standards. This is creating a lot of pressure on the industry and forcing the steel makers to reduce output and, in some cases, to update their assets.

This new policies come in line with the Chinese economy slow down and the reduction of demand for the steel and its main resource, the iron ore. This has generated a crisis in the steel manufacturing industry that has seen a reduction of revenue and an increase of the operational cost in the last year.

There is a potential risk of massive plants shut downs due to an important number of the steel makers won’t be able to afford the high cost that an update represents. This is also a consequence of poor government regulations during the economic boom that did not stimulate the companies to reinvest the capital in new and cleaner technologies when the revenue was higher.

The social pressure has forced the government to take strong policies orientated to reduce the steel production capacity with the aim to minimize and control the toxic emissions. This represents a massive economic impact for the government which will be affected by lower tax revenue and potential increase of unemployment.

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INTRODUCTION

The Hebei province, well known as the biggest steel producer in China and the second worldwide, contributor of the 22.5 percent of the national steel output is facing a critical time. The reports demonstrate a fall of 0.6 percent from the total steel production in 2014 in comparison to the 2013 figures and China’s total production is expected to drop 1.07% to 814 million tonnes by 2015. (Stanway, 2015; the Australian, 2015). The main reason for this crisis is the reduction in demand for the Chinese market and the new environmental policies that restrict the operation of plants that exceed the new emission standards (Li 2013). This environmental issue has situated the province within the top 10 most contaminated cities in China and has been affected people’s health critically reducing life expectancy by five years (Cai P., 2015; Stanway, 2015). As a consequence, there is a strong social pressure that request fast solutions to a problem that seems not to have a sustainable solution in the short term.

This article address the following issues:

• The economic impact of the reduction of steel production’s output in the province of Hebei and its repercussion on the steel and iron prices in the short and medium term.
• The impact of the new environmental policies that force the shutdown of steel’s factories that don’t meet the minimum emission standards.
• Reduction in the demand of steel, impact on the government revenue and increment in the unemployment rate.