CHINA: THE STEEL INDUSTRY IN THE 1970S AND 1980S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86B00985R000300040017-8
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• Document Creation Date: December 9, 2016
• Document Release Date: February 1, 2001
• Sequence Number: 17
• Publication Date: May 1, 1979
• Content Type: RP

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Assessment
Center
China: The Steel Industry
In the 1970s and 1980s
ER 79-10245
May 1979
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National
Foreign
Assessment
Center
China: The Steel Industry
In the 1970s and 1980s
A Research Paper
Research for this report was completed
on 15 April 1979.
Comments and queries on this unclassified report
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ER 79-10245
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China: The Steel Industry
In the 1970s and 1980s
Key Judgments The People's Republic of China has launched a massive effort to boost steel
production rapidly to help raise the country to a first-rate industrial power
by the end of the century. Last year the Chinese leadership called for a
doubling of steel output to 60 million metric tons by 1985 and started a
major construction program to provide the needed capacity at all stages of
production. Recently, however, the PRC has begun to doubt the feasibility
of the program and has begun to cut back its original goals.
Broad Scope of the Program
In February 1978 Premier Hua Guofeng announced that China planned to
build or expand 10 major steel centers under the current l0-year economic
plan (1976-85). The program called for constructing two or three new
complexes and upgrading seven existing steel centers. The Chinese have
already started work on a new 6-million-ton plant at Baoshan (Pao-shan)
near Shanghai and are negotiating with West Germany and Japan for a
proposed 10-million-ton plant to be located east of Beijing in Hebei (Hopeh)
Province. In addition, the Chinese have entered into preliminary discussions
with a number of Western firms for help to modernize several existing steel
mills. Most of the new plant and technology must come from the West
because the Chinese lack the know-how to build large-scale, integrated
plants.
Chinese plans also call for simultaneous improvements in the long-neglected
iron ore sector. Although iron ore reserves are huge, most deposits are of low
quality and require extensive upgrading before they are suitable for
ironmaking. China has reached preliminary agreements with three US firms
for development of four iron mines and pelletizing facilities. As many as 14
mines could ultimately be developed under the current plan. Some of the
mines could eventually rank among the largest in the world.
High Cost
Modernization of the steel industry will be expensive. The Baoshan complex
will probably cost $3-4 billion, and the plant proposed for Hebei Province
could run as high as $14 billion. Upgrading existing plants could cost more
than $10 billion in hard currency, depending on how much of the work is
done by the Chinese themselves. In addition, iron ore mines and
beneficiation facilities could add another $5-10 billion to the total. Hard
currency spending could thus reach $40 billion by the time the current plans
are finally achieved.
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Overambitious Goals
The Chinese are beginning to realize that China lacks the human and
material resources and the infrastructure to carry out the program by 1985.
Construction personnel and the material inputs needed to erect imported
facilities are in short supply, as are skilled managers and technicians with
the know-how to operate modern iron and steel plants. Moreover, the
enormous scope of the plan would require huge investment resources badly
needed in light industry and agriculture. In the longer run, all of these
problems may be overcome, but meanwhile the Chinese leaders have been
cutting back the 1985 steel target, perhaps settling on a more feasible 45
million tons. Achievement of this target would still ensure that the PRC
retained its position as the world's fifth largest steel producer-behind the
USSR, the United States, Japan, and West Germany.
Sizable Imports
The poor production record of the 1970s-largely attributable to the
political turmoil centering around the succession struggle of 1974-76-
forced Beijing to expand iron and steel imports sharply in recent years; steel
is now the largest single category in China's import bill. Steel imports
reached almost $1.5 billion in 1977, nearly four times the figure for 1970.
Finished steel items-primarily plate, sheet, tube, and pipe-account for
about 90 percent of Chinese purchases and probably reached 7 million tons
last year. Japan is the largest supplier, accounting for more than 70 percent
of China's imports.
China will need to import steel products well into the 1980s. Although
domestic output of crude and finished steel no doubt will rise substantially
above the 32 million tons produced last year, output will be insufficient to
supply the quantity, quality, or variety of products required for the stepped-
up modernization program. Purchases abroad will continue to be dominated
by finished steel products; at the same time, growing amounts of iron ore will
be bought until domestic ore mining and ore-preparation facilities are
greatly expanded.
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Historical Development
Soviet Influence
The Great Leap Forward
Retrenchment
The Cultural Revolution
Production in the 1970s
Gang of Four Disruptions
Return of Stability
Iron and Steel Plants
Structural Imbalance
Steelmaking
Ironmaking
Steelfinishing
Imports
The Modernization Program
Planned Facilities
Iron Ore Development
Cost of Steel Expansion Program
Outlook: Contractions in Goals
Selected Countries: Steel Production, 1978
3. China: Imports of Iron and Steel
4. China: Supply of Steel
5. China: Plans for Enlarging Steel Plants
1. Major Iron and Steel Facilities
2. Steel Production and Capacity
3. Imports of Iron and Steel by Countries, 3977
4. Potential Iron Ore Expansion Sites
5. Potential Cost of the Modernization Program
7
10
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China: Major Iron and Steel Facilities
Chinese Line
of Control
err New plant
Existing plant
L. Large
Medium
O Facility to be
modernized
0 500
Kilometers
Capitol
Kunming
Guangzhou
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China: The Steel Industry
In the 1970s and 1980s
Soviet Influence
Since it came to power in 1949 the leadership of the
People's Republic of China has viewed the develop-
ment of a strong steel industry as a high national
priority. With extensive Soviet aid, the Chinese began
to rebuild war-ravaged steel plants immediately after
the Communist takeover. The Soviet Union provided
advisers, technology, and equipment for this task.
Initial projects included reconstruction of the steel
mills at Anshan (An-shan), Benxi (Pen-chi), Taiyuan
(T'ai-yuan), and Maanshan (Ma-an-shan). In addi-
tion, new plants were started at Wuhan and Baotou
(Pao-t'ou) (see map, figure 1).
Steel output expanded smoothly during the early
1950s. Production surpassed the pre-Communist high
of 900,000 tons by 1952 and reached 5.35 million tons
in 1957, the final year of the Soviet-style First Five-
Year Plan. In addition to the large increases in
production, Chinese mills turned out a growing variety
of products and raised productivity as more efficient
equipment was installed. Under Soviet tutelage, more
and more Chinese became experienced in operating
and managing steel facilities.
The Great Leap Forward
Despite steady progress in steel and other branches of
industry, Chairman Mao felt that growth could be
even more rapid, and in 1958 he launched the Great
Leap Forward, an ill-advised attempt at instant
industrialization. Small iron and steel plants sprang up
all over the country. These plants featured the
notorious backyard furnaces and small, obsolete side-
blown converters for making steel. Output from these
primitive facilities gave rise to exaggerated claims of
huge increases in steel production. The Chinese
claimed, for example, that steel production more than
doubled in 1958 and jumped another 70 percent by
1960.
Simultaneously, the Chinese proceeded with the con-
struction of modern plants. Installation of equipment
was speeded up, and capacity at the large plants
reached about 12 million tons by the end of 1960. The
Chinese reported that output from the large plants
exceeded their rated capacity, reaching almost 13
million tons in 1960. These plants were operated
around the clock with little attention to maintenance or
repair. The new small-scale plants added another
6 million tons of steel production. The steel from small
plants was nearly useless, however, and the low quality
of ores and pig iron used at the modern plants reduced
the quality of their output as well.
Retrenchment
Following the Great Leap Forward, China closed
almost all of the small facilities and began to repair the
damage done to the large steel mills. Production fell
from a claimed 19 million tons in 1960 to an estimated
8 million tons in 1961 and stayed at that level through
1963.
During the period of comparatively moderate policy
(1961-65), China began to look to the West for modern
steelmaking technology. After Krushchev pulled out
the Soviet advisers and their blueprints in mid-1960,
China was unable to push forward its steelmaking
technology on its own. Accordingly, it bought basic
oxygen furnaces from Austria and electric furnaces
and air separation plants from Japan. Steelmaking
capacity reached almost 18 million tons by yearend
1965 and production advanced to 15 million tons in
1966 (see figure 2). The new plants at Wuhan and
Baotou contributed growing amounts of steel and steel
products, and selective improvements boosted produc-
tion at existing plants. Although production still
lagged behind the spurious claim of 1960, quality was
vastly improved and a wider variety of finished
products was produced.
The Cultural Revolution
The Cultural Revolution (1966-69) caused another
downturn in the steel industry. In 1966, when the Red
Guards were being mobilized, production climbed to
15 million tons, then plummeted to 10 million tons in
1967 and dropped further to only 9 million tons in
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 Steel Production
Capacity
1968. Factional fighting and political demonstrations
disrupted many steel plants, and the vast numbers of
Red Guards traveling around the country over-
whelmed the transportation system. Political dis-
turbances also hurt the coal industry, and shortages of
coking coal further impeded steel production. Com-
pared with the Great Leap Forward, however, these
problems were minor and temporary. Despite sporadic
interruptions in supplies of construction materials, the
Chinese maintained a vigorous investment program in
steel and other industrial branches during the Cultural
Revolution; steel capacity stood at about 24 million
tons in 1970.'
After the interruptions of the Cultural Revolution,
steel production advanced rapidly, doubling between
1968 and 1970 (see table 1). The PRC had utilized
For a more detailed discussion of the steel industry in the 1950s and
1960s see "China's Iron and Steel Industry," China: .4
Reassessment of the Economy, Joint Economic Committee, 94th
Congress, Ist Session, 10 July, 1975, pp. 264-288.
only about 40 percent of its steelmaking capacity in
1968; almost 13 million tons of operable capacity was
standing idle. The return of political stability enabled
managers to quickly activate a large part of these
facilities. In 1973, steel production reached a record 25
million tons. In addition, China reintroduced small
steel plants during this period. These plants, which
were much improved over the earlier facilities, used
nearby materials and labor to produce iron and steel
for local consumption. Construction of small plants
helped boost the 1975 capacity level to about 30
million tons.
Gang of Four Disruptions
In 1974-76, political disturbances associated with the
Gang of Four faction and the struggle over the
succession to Chairman Mao sharply depressed steel
output. Production in both 1974 and 1976 amounted to
only 21 million tons, whereas in 1975, a comparatively
orderly year, production was at 24 million tons.
Massive in-plant disruptions, factional fighting, and
political rallies were common, particularly at the large
 Year
Million
Year
Million
Year
Million
Metric Tons
Metric Tons
Metric Tons
1949
0.158 _
1959
13.35
1969
16
1950
0.606
1960
18.67
1970
17.8
1951
0.896
1961
8
1971
21
1952
1.349
1962
8
1972
23
1953
1.774
1963
8
1973
25
1954
2.225
1964
9.6
1974
21
1955
2.853
1965
12.2
1975
24
1956
4.465
1966
15
1976
20.5
1957
5.35
1967
10
1977
23.7
1958
11.08
1968
9
1978
31.7
plants at Wuhan and Anshan. The Chinese reported,
for example, "In the three years of 1974-76 the Gang
of Four faction caused the Wuhan Iron and Steel
Company to lose one and one-half years' output." The
steel industry was further affected in July 1976 by the
major earthquake that hit Tangshan. The Tangshan
steel plant--a I-million-ton producer-was heavily
damaged, with the Kailuan (K'ailuan) coal mine at
Tangshan also hard hit. Loss of output from the
Kailuan mine, a leading producer of high quality
coking coal, forced sharp cutbacks in operations at
Anshan and mills in the Beijing area.
Return of Stability
The recovery after the downfall of the Gang of' Four
(October 1976) has been swift. China's new leadership
has strongly emphasized the need to increase produc-
tion, and, with the return of political stability, the steel
industry has rebounded. In 1978, steel output reached
almost 32 million tons, finally surpassing the 1973
peak.
The situation confronting the Chinese steel industry
after the fall of the Gang of Four was similar to the
situation in the aftermath of the Cultural Revolu-
tion-China's ability to increase steel production by
more than I I million tons between 1976 and 1978
again rested on the existence of large amounts of
underutilized capacity. Capacity utilization in 1976
was under 70 percent, with almost 10 million tons of
operable steelmaking capacity lying idle, In late 1977,
Selected Countries:
Steel Production, 1978
Steel Production
(Million Metric
Tons)
Per Capita
Production
(Kilograms)
USSR
151.0
577.7
United States
124.0
567.8
Japan
102.1
887.8
West Germany
41.2
670.0
China
31.7
31.6
Italy
24.3
428
6
France
22.8
.
427.0
United Kingdom
20.3
363.1
Poland
19.3
551
4
Czechoslovakia
15.3
.
1,013.2
Brazil
12.1
104.9
India
9.5
14.4
Mexico
6.4
97.3
moreover, 3-4 million tons of new capacity came on
line with the completion of a 1.5-million-ton blast
furnace at Anshan and the activation of new
steelmaking facilities at Wuhan and Benxi. These
additions boosted total capacity to about 34 million
tons in 1978.
The spurt in production in 1978 lifted China to fifth in
world output-behind the Soviet Union, the United
States, Japan, and West Germany. China's high
standing in aggregate steel production contrasts with
its low ranking in per capita production--31.6 kilo-
grams per capita in 1978. Brazil, for example, has a per
capita output over three times that of China. Com-
pared with developed countries, China's per capita
output is only about 5 percent of US per capita output
and 4 percent of Japan's (see table 2). On the other
hand, China produces more than twice as much steel
per head as India.
Iron and Steel Plants
China's 34 million tons of capacity is divided among
approximately 300 plants that produce iron, steel, or
iron and steel. The most famous is the integrated
facility at Anshan, which produced more than half of
China's steel in 1957 and still produces more than one-
 fifth. This plant, together with the other eight or nine
facilities capable of producing I million tons or more
per year, account for 80 to 90 percent of total pro-
duction. Other large plants are located at Shanghai,
Wuhan, Baotou, Beijing, Chongqing (Chungking),
Maanshan, Taiyuan and Benxi. In addition the Chi-
nese recently announced the existence of a new
facility Banzhihua (Panchihhua) in southern
Sichuan (Szechwan) Province--that qualifies as a
large plant. (u)
With the exception of the Shanghai plant, all of
China's major steel mills are located near domestic
supplies of coal and iron ore. The Shanghai mill, the
only plant with a coastal location, produces small
amounts of pig iron. It is primarily designed to make
and finish steel from pig iron produced at other
locations. Consequently, ready access to iron ore is
unnecessary. The Banzhihua plant's remote location
was chosen as part of China's policy of dispersing
industry for defensive purposes.
The vast majority of the medium and small plants
operate near the bottom of the technological scale and
in the main provide low-quality iron for local consump-
tion. The typical small plant probably produces less
than 5,000 tons of steel yearly. Some of the medium-
sized plants, however, make an important contribution
to the industry's output. The Fulaerji (Fu-la-erh-chi)
plant is a leading producer of high-quality alloy steel,
and the plant at Tangshan, reconstructed after the
1976 earthquake, produces almost I million tons of
steel annually. Other important medium-sized facili-
ties are found at Dayc (Ta-ye), Guangzhou (Canton),
.Iiangyou (Chiang-yu), Luda (Dairen), Xiangtan
(I Isiang-tan), Xuanhua (Hsuan-hua), Kunming
(K'un-ming), Shenyang (Shen-yang), and Tianjin
(Tientsin).
The erratic growth of China's steel industry has made
the task of carrying out a coherent development
strategy extremely difficult. Planners have had to
contend with recurrent political upheavals, charging
economic priorities, and interruptions to the inflow of
foreign technology. Consequently, the industry has
been characterized by pronounced imbalances--many
of which persist to this day. Output of pig iron lags
behind the needs of the steel furnaces, and blast
furnace requirements for iron ore are not being met.
Similarly, China's steelfinishing sector is unable to
process the outflow of crude steel.
Steelmaking
The production of crude steel is the strongest stage of
China's steel industry. In the 1950s the USSR
provided the equipment and technical support to
construct numerous large, modern open-hearth fur-
naces (OHFs). Productivity at these furnaces has been
improved through the use of oxygen injection, and
today the open hearths account for 60 to 70 percent of
capacity. Basic oxygen furnaces (BOFs), which domi-
nate steelmaking in most advanced countries, account
for only 15 to 25 percent of Chinese capacity. The
USSR had only begun to provide basic oxygen
technology when it withdrew its technicians in 1960,
and China has been slow to introduce this technology
on its own. Today, most new Chinese steel furnaces are
BOFs. Electric furnaces represent 5 to 10 percent of
capacity and produce high-quality and specialty steels,
while the outmoded side-blown converter is the stand-
ard furnace at local steel mills.
Ironmaking
China, a net exporter of pig iron in the 1950s and
1960s, has had to import growing quantities in recent
years. Growth of pig iron production in the 1970s has
not matched China's capacity to make steel and cast
iron products. The Chinese have recognized this
deficiency; a new 1.5-million-ton blast furnace was
completed at Anshan in 1977, and a new 800,000-ton
furnace was recently completed at Maanshan. Other
new blast furnaces are reportedly under construction.
The Soviet Union provided China with a large number
of blast furnaces in the 1950s. After the Soviet
withdrawal the PRC continued to construct its blast
furnaces according to Soviet designs. These furnaces
are generally well constructed, and the addition of
modern instrumentation has improved operating
efficiencies.
 The greatest problem confronting China's blast fur-
nace operators is the poor quality of the metallic blast
furnace burden. China is almost completely dependent
on sintering of low-quality ore for blast furnace feed.
Most Chinese ores, however, are poorly suited to this
type of beneficiation. Foreign technicians who have
visited Chinese steel plants have estimated that the
PRC could increase its pig iron output 20 to 30 percent
by adopting more appropriate beneficiation and ag-
glomeration practices.
Strains on iron supplies also are increased by limita-
tions on the supply of scrap in China. The PRC, with
its short history of industrialization, has not had much
time to build up backlogs of aged and discarded metal
goods. In addition, shortages of both consumer and
capital equipment leads to long extensions of service
life. This general scrap shortage forces the Chinese to
use a high proportion of hot metal in the steel furnace
charge.
Steelfinishing
Steelfinishing has been the weakest sector of the
industry since the 1950s. Although the Soviets pro-
vided some finishing mills under their aid program,
finishing capacity failed to grow as rapidly as iron or
steelmaking capacity. At the Wuhan plant, for exam-
ple, the Soviets withdrew before planned finishing
facilities were constructed. The Chinese have been
able to produce only a small variety of finishing
equipment on their own. In 1978, finished steel
production amounted to about 21 million tons, only
two-thirds of crude steel output.
China's steelfinishing capacity consists primarily of
large blooming and structural mills and a considerable
number of rod and bar, plate, sheet, and welded and
seamless tube mills. The PRC has few wide sheet or
strip mills, or tinning or galvanizing lines. Little cold
rolling capacity exists as most mills are designed for
only hot rolling.
Recognizing their need for additional steelfinishing
capacity, the Chinese in 1973-74 contracted with
Japan and West Germany for a $500 million complex
to be installed at the Wuhan steel mill. This facility
features a 3-million-ton, 1,700-millimeter hot strip
mill, a continuous slab caster, an electrical sheet plant,
a cold rolling mill, and galvanizing and tin-plating
lines. The Chinese recently announced that the instal-
lation of most of the equipment was complete, and the
mill should go on line sometime this year, about three
years behind schedule.
China's imports of iron and steel have grown steadily
during the 1970s. The domestic steel industry has been
unable to supply either the quantity or the variety of
output required by the construction and machine-
building industries, which together account for 85
percent of Chinese steel consumption. The slow growth
of output, coupled with the shortcomings of the
steelfinishing sector, has forced the PRC to turn to
foreign sources of supply. Imports, which totaled less
than $400 million in 1970, amounted to $1.5 billion in
1977. During this period Beijing spent more than $7.7
billion on purchases of foreign iron and steel, making it
the largest single category in China's import bill.
Imports of iron and steel are dominated by finished
steel items (see table 3). These products account for
about 90 percent of total purchases. China imports
large amounts of steel plate and sheet, strip, tube and
pipe, and alloy steel. Expansion of the petroleum
industry requires more and better quality pipe than
China's antiquated pipe mills can produce, and thin
sheet and strip and cold rolled items are not produced
in sufficient quantities for motor vehicles and other
machine-building applications. Until domestic
finishing capabilities are improved, imports of these
items will continue to grow. Finished steel imports
exceeded 4.4 million tons in 1977 and probably
reached 7 million tons or more in 1978. In addition,
China imports small quantities of crude and
semifinished steel. About 250,000 tons valued at $44
million were purchased in 1977.
China's efforts to utilize more fully its blast furnace
and steelmaking capacity have led to increased imports
of iron ore and pig iron. As noted earlier, China
produces insufficient amounts of both items to keep its
iron and steelmaking facilities fully employed. Iron ore
purchases totaled 2.4 million tons in 1977, almost five
 Total
377.1
451.1
503.3
930.6
1,196.7
1,453.7
1,353.7
1,453.7
Pig iron
1.7
23.5
24.3
52.4
90.0
51.5
29.7
70.3
Crude steel
1.9
4.3
1.5
33.4
71.4
105
59.9
44.3
Finished steel
358.5
402.5
449.0
799.6
984.5
1,248.7
1,232
1,310.2
Iron ore
5
6
7
9.4
27.2
27.8
26.6
27.7
Scrap
10
14.8
21.5
35.8
23.6
20.7
5.5
1.2
Pig iron
26.3
487.2
488
789.2
756.9
440.5
328.3
846.8
Crude steel
14.7
39.7
10.2
234.9
416.3
557.5
356.6
256.0
Finished steel
2,143.7
2,198.4
2,295.6
3,456.1
3,230.2
3,307.6
3,945.5
4,422.6
Iron ore
500
600
700
934.5
2,730.1
2,474.5
2,369.8
2,405.0
Scrap
165.2
345.4
560.2
581.6
252.8
241.5
65
17.5
times that purchased in 1970. Imports in 1978
probably reached 6 million tons. Imports of pig iron
peaked in 1977 at 847,000 tons, worth $70 million. In
comparison, pig iron purchases in 1970 were only
26,000 tons. Scrap imports have fallen steadily since
they reached almost 600,000 tons in 1973. Imports in
1977 were less than 20,000 tons.
Japan is by far the largest supplier of iron and steel to
China (see figure 3). With 1977 sales of more than
$1 billion, Japan accounted for 70 percent of China's
total iron and steel imports. Japanese sales are
concentrated in finished steel products, particularly
steel plate and sheet. West Germany is China's second
leading source. German iron and steel exports to the
PRC amounted to $218 million in 1977, almost three-
fourths of which consisted of steel tube and pipe.
Australia, China's leading source of iron ore, is the
third largest overall supplier of iron and steel. Austra-
lia also sells considerable quantities of pig iron.
Despite growing purchases of iron and steel, China's
total steel supply-production plus imports-has
grown slowly during the 1970s. Between 1970 and
1978 supply grew almost 8 percent annually, but
between 1970 and 1977 the rate was only a little over
5 percent. Not until 1978 did total supply surpass the
previous peak reached in 1973 (see table 4). The slow
growth of supply indicates that Beijing must maintain
steel imports at a high level if it is to carry through its
sweeping modernization program. During the 1970s
imports have accounted for about 15 percent of total
steel supply, and more than 20 percent of finished steel
supply. Domestic output will be insufficient to provide
the required amounts of steel well into the 1980s; thus,
the PRC will be forced to continue large-scale steel
imports-at a considerable cost in scarce foreign
exchange or amassed debt.
China's program to modernize its steel industry is
intended to redress longstanding bottlenecks and to
double existing capacity and output by 1985. The
industry today is plagued by imbalances between
sectors and dated technology. The weak links-
principally mining and processing of iron ore and
 China: Imports of Iron and Steel
by Countries, 1977
Total Imports
US $1,453.7 million
finishing capabilities-need improvement, and exist-
ing plants require infusions of modern technology to
boost productivity. Fuller use of existing capacity is not
a promising solution, since the steel industry has
recently been operating at more than 90 percent of
capacity. Perhaps another several million tons of
output could be squeezed out of existing plants, but any
large increase in production must await new capacity
coming on stream. Only by introducing modern
technology and constructing new plants can China
hope to restore internal balance to the industry and
increase output sufficiently to meet the rapidly grow-
ing demand for steel.
Planned Facilities
The 10 steel centers China plans to construct by 1985
consist of two or three totally new facilities and
expansion of seven or eight existing plants. New
facilities are planned for Shanghai and eastern Hopeh
Province. Existing plants reportedly slated for expan-
sion and upgrading include Anshan, Benxi, Capital,
Baotou, Taiyuan, Wuhan, Maanshan, and possibly
Chongqing.
Production
Imports
Supply
1970
17.8
2.2
20.0
1971
21.0
2.2
23.2
1972
23.0
2.3
25.3
1973
25.0
3.7
28.7
1974
21.0
3.6
24.6
1975
24.0
3.9
27.9
1976
20.5
4.3
24.8
1977
23.7
4.7
28.4
1978
31.7
5.0
36.7
Preliminary.
A preliminary contract for the initial project, the
Baoshan steel plant near Shanghai, was signed with
Japan's Nippon Steel Corporation in April 1978. This
plant has a designed capacity of 6 million tons; half to
be operational by January 1981. The remainder is
scheduled to come on line two years later. Ground-
breaking ceremonies took place in mid-December, and
pilings are currently being placed. The plant's coastal
site has a soft geological structure, and pilings for the
blast furnaces and heavy equipment in the rolling mill
will extend to a depth of 70 meters. Altogether, about
300,000 tons of steel pilings will be required for the
plant.
Baoshan's coastal location was chosen despite its poor
geology to facilitate transportation of imported iron
ore. When fully operational, the plant will probably use
more than 10 million tons of foreign iron ore yearly,
most of which will likely come from Australia and
Brazil. Inland shipment of the ore would place
additional strains on China's already overburdened
transport system. Moreover, the plant will be able to
provide the heavily industrialized Shanghai area with
an expanded supply of high-quality steel. The Chinese
anticipate this will help boost industrial production in
the area.
 The Baoshan plant will incorporate the latest
steelmaking technology. The facility is to be modeled
on Nippon's Kimitsu plant, one of the most modern in
the world.
Sumitomo Metal Industries will construct a 400,000-
ton seamless pipe mill as part of the Baoshan complex.
Sumitomo had previously refused to sell its superior
plant design and layout, but apparently hopes this will
help win additional contracts for plants to be built
later. This mill, which produces primarily oil drilling
pipe, is scheduled to be completed in 1981.
Negotiations on price and payments terms for the
Baoshan project are not yet complete, but most cost
estimates fall between $3 billion and $4 billion. This
total includes funds for related facilities such as power
plants, port improvement, and site preparation. The
Baoshan plant alone will cost roughly as much as all of
China's industrial plant imports in 1972-77.
Preliminary discussions have been held with Japanese
and West German firms for the construction of a 10-
million-ton plant near Qinhuangdao (Chin-huang-tao)
or Jidong (Chi-Yung) in the Be Hai (Po Hai) Bay area
of Hebei Province. This could be one of the world's
largest steel mills. The plant will be located in an
earthquake-prone area near Tangshan. Large reserves
of iron ore are available, however, and the Kailuan coal
mines are nearby. The facility will also have access to
several ports and will be able to serve the Tianjin
industrial center.
A West German consortium led by Scholemann-
Siemag AG has been actively pursuing this contract.
The companies have proposed a two-stage construction
program that would see completion of the first stage,
with a capacity of 6 million tons, in 1985. The Chinese
have indicated a preference for a German plant, noting
that while Japanese mills use high-quality imported
iron ore and coking coal, German plants are designed
to use raw materials of a quality similar to that
available in China. Dresdner Bank has proposed a 10-
year, 28-billion-mark credit to finance the package. If
the bid is successful, the size of the order would be a
record for German companies and would be accompa-
nied by one of the largest credits ever granted. In early
1979, however, Chinese leaders began to harbor
serious doubts about pushing ahead with this project in
the short run.
Talks have also been held with several Japanese and
British steel firms for the construction of the Hebei
facility. China has asked Nippon Steel to submit a
proposal for the Hebei plant. Nippon is reluctant to
commit itself to the project and has suggested that
other firms might be in a better position to assume
responsibility for the undertaking.
The enlargement and modernization of existing plants
will be accompanied by a combination of Chinese and
foreign efforts. China has the capability to produce a
wide variety of basic steelmaking equipment and will
likely supply some of the more simple items. Foreign
participation will probably center around large-scale
capacity additions and the provision of technically
advanced pieces of steelmaking equipment. In addi-
tion, foreign firms will undoubtedly supply a variety of
engineering and technological services.
The modernization and rounding out of existing plants
offers many benefits to China. Internal balance can be
achieved, and obsolete production processes can be
scrapped. In some cases, new equipment is vital if other
segments of a plant are to perform up to design. At
Wuhan, for example, the new continuous caster
requires more frequent supplies of hot metal than
open-hearth furnaces can supply and the new BOFs
China added in 1977 are very small. This plant is thus
a logical site for a large BOF. Indeed, the Chinese have
expressed interest in Q-BOP, or bottom-blown oxygen
furnace developed by a US firm. Moreover, expansion
of existing facilities is generally less expensive than
building new greenfield plants. Brand new capacity
costs about $1,000 per ton, while brownfield costs
average about $500 per ton.
The order in which China plans to upgrade existing
facilities is unknown. China has, however, made
inquiries with a number of firms in Japan, Western
Europe, and the United States about enlarging and
modernizing selected installations (sec table 5).
 China: Plans for
Enlarging Steel Plants
Total
Current
Capacity
19'
Projected
Capacity
41
Wuhan
3.5-4
6
Maanshan
1.5-2
NA
Baotou
1.5-2
3
Capital (Beijing)
1.5-2
5
Anshan
7
15
' Maximum capacity.
z Excluding Maanshan.
Implementation of these plans will yield a minimum of
24 million tons of new capacity. This new capacity,
when combined with the Hebei and Baoshan installa-
tions, could increase China's steelmaking capacity by
40 million tons, boosting the overall figure to more
than 70 million tons. A capacity utilization rate of 85
percent would enable China to reach its target of 60
million tons of output.
China has also begun to award contracts for improve-
ments at some of its smaller steel mills. Daido Steel
Company of Japan recently announced that it has
agreed to provide technical assistance for the modern-
ization of four medium-sized steel plants at Fushun
(Fu-shun), Luda, Dayc, and Tiajin. The eventual cost
of these projects will probably be approximately $300
million to $500 million.
Iron Ore Development
China has abundant supplies of the natural resources
necessary to become a major steel producer. Iron ore,
coal, and limestone deposits are widespread and
plentiful. In addition, China has large reserves of
alloying materials such as manganese, molybdenum,
tungsten, and vanadium. The most serious shortages
are in certain alloying materials, particularly cobalt
and chromium; China needs to import nearly its entire
supply of these two metals.
Reserves of iron ore are huge. Published estimates
range from a pre-1949 figure of 2 billion tons to the
Chinese claim of 100 billion tons made during the
Great Leap Forward. Total reserves probably ap-
proach the latter figure. In any event, reserves are
more than sufficient for foreseeable requirements.
Much of China's iron ore is low quality. Although
scattered deposits of high-quality ore exist, the bulk is
probably around 30-percent iron content. Ores of this
grade require extensive bencficiation before being fed
into ironmaking furnaces. Despite foreign advice,
China so far has been slow to invest in adequate
bencficiation facilities.
With the exception of the Baoshan plant, all of China's
new or expanded steel centers will be located near
supplies of iron ore. China plans to develop its iron ore
resources quickly so these plants will be able to use
domestic ore for their growing production. Although
Baoshan initially will be supplied with imported ore,
the Chinese hope to phase out imports for this plant
sometime during the 1980s. Despite China's huge iron
ore reserves, an enormous development effort will be
required to attain self-sufficiency. China was unable to
produce the approximately 60 million tons of standard
ore (55-percent iron content) needed for steel produc-
tion in 1978. By 1985, if the steel goal is reached,
standard ore requirements will reach about 120 million
tons, more than double current production. In addition,
as the PRC is forced to move to poorer deposits, actual
tonnages mined will have to exceed standard ore
requirements by growing margins.
The Chinese program to increase iron ore output
features the development or expansion of approxi-
mately 14 major mines. Most of these are located in
North, Northeast, and Central China, each having a
potential for 15-60 million tons of ore annually. The
ores at these mines contain only about 30-percent iron,
so extensive beneficiation will be necessary. The
Chinese apparently plan a widespread introduction of
pelletizing plants to upgrade the ore. Currently,
modern pelletizing technology is practically non-
existent in China.
 The Chinese plan to acquire Western equipment and
technology to develop their iron mines and to build
pelletizing plants. Three US firms have already
received preliminary contracts to develop four mines.
Additional proposals are being discussed and more
contracts are expected.
Two of the mines for which preliminary contracts have
been awarded will supply iron ore to the new steel mill
WJianshan
(precise location
unknown)
to be built in Hebei Province. These are the Shuichang
(Shuich'ang) and Sijiaying (Szechiaying) mines. Each
will produce about 10 million tons of pellets yearly.
Development of the two mines will probably cost
nearly $2 billion. Besides the new Hebei plant, these
mines could also supply the Capital and other plants in
the Beijing area and may eventually ship pellets to the
new plant at Baoshan.
 Expansion of the Jidashan (Chi-da-shan) mine will
supply some of the ore needed to support the proposed
doubling of steel production at Anshan. Production
from this mine is set at 17 million tons of pellets. About
45-50 million tons of ore will be required for this level
of production. The total cost of this complex could
exceed $1 billion. The other mine that will be initially
developed is the Nanfen (Nan-fen) mine near the
Benxi steelworks. Production may eventually reach 60
million tons of ore that will be converted into approxi-
mately 20 million tons of pellets. This project could
cost $500 million to $1 billion.
Little precise information is available on the other
mines the Chinese plan to develop by 1985. The
Chinese are studying a number of other properties,
however, and at least some of the following mines will
be expanded to help meet China's growing iron ore
needs: Dong Anshan (Tung Anshan), Xi Anshan (Hsi
Anshan), and Dagushan (Ta Kushan) near the An-
shan Iron and Steel Company; the Paiyun (Pai-yun)
mine near the Baotou steel mill; the Egon (01ou)
mine near the Taiyuan steelworks; Daye at the Wuhan
mill; and the Jianshan (Chien-shan) and Yanbei (Yen-
pei) mines in Shanxi (Shansi) Province (see map,
figure 4).
Cost of Steel Expansion Program
The costs of China's proposed steel expansion program
are enormous. Potential plant and technology imports
at the 10 steel centers easily surpass $20 billion (see
figure 5), Several billion more could be spent on
smaller steel facilities. In addition, mine development
and beneficiation facilities could add another $5- 10
billion to the total. Thus, the potential hard-currency
spending on the entire steel industry modernization
plan could reach $40 billion.
China will undoubtedly be forced to defer its ambitious
goal of doubling steel output by 1985. Perhaps the
most overwhelming task in achieving the goal is the
sheer size of the planned construction program. Since
1957 the Chinese have been able to add, on average,
about 1.3 million tons of new steelmaking capacity
yearly. The goal of 60 million tons of steel by 1985
requires the addition of 4 million tons of capacity
China: Potential Cost of
the Modernization Program
Billion US $
20
New Plants Expansion of Mini- Iron Ore
Existing Plants Mills Development
annually for the next seven years. This is an unrealistic
target that would be difficult to reach under the best of
circumstances.
The supply of skilled construction workers is limited;
huge quantities of heavy construction equipment
would have to be imported to support the program; and
the massive construction effort would also require
more inputs of cement and other materials than China
can supply. (The Chinese already are experiencing
shortages of cement and will become a net importer in
1979 for the first time since the early 1950s. At least 2
million tons will be purchased from Japan this year at a
cost of $120 million.)
The decade of upheaval in China's educational system
(1966-76) has left a serious gap in the ranks of
scientists and engineers, which directly affects the steel
program and simultaneously makes it more difficult to
pry professional manpower away from other uses.
Beijing is attempting to overcome this deficiency by
 restoring standards in domestic education and by
sending students abroad; results will be slow in coming.
Another problem facing the Chinese is the weak
infrastructure associated with building and operating
large steel complexes. Transport facilities and electric
power systems are backward and barely able to cope
with the needs of an industrial sector growing at an
average 9 percent a year. As a case in point, the newly
opened section of the Wuhan steel mill can only
operate four hours per day because of a chronic
shortage of electric power.
As evidence that Chinese officials realize their goals
for the steel industry are unattainable by 1985, Vice
Premier Li Xiannian stated in a March 1979 interview
with a Japanese newsman, "The Chinese economic
construction plan has some overambitious aspects. We
are now thinking about whether major targets, includ-
ing iron and steel output, should be revised." In
addition, Vice Premier Kang Shien indicated in April
that the Hebei Province plant and expansion at
Anshan would almost certainly be delayed.
Besides their technical inability to reach the steel
target, Chinese officials probably are backing away
from the 60-million-ton goal because of the tremen-
dous cost of the program. The Chinese have been
shocked when presented with cost estimates for various
projects. They have started to realize that such high
levels of spending would siphon funds from investment
in agriculture and light industry and could lead to
unbalanced development and tie up investment re-
sources in projects that would not generate returns for
many years, In contrast, investment in light industry
has a much quicker payoff time.
Given the technical and financial problems described
above, we think Beijing will slash its steel target to
perhaps 45 million tons. China should be able to reach
this level of output with the completion of the Baoshan
plant and selected additions to existing mills. The goal
of 60 million tons will probably be stretched out to
1990 or beyond. In the longer run, the future of
China's steel industry is bright. With its abundant raw
materials and the infusion of Western technology,
China should eventually be able to develop a steel
industry comparable in size to the steel industries of
the United States, the USSR, and Japan.