The Double Challenges of Chinese Aluminum and Cement Industries under the Changing Environment

From ToxicLeaks

Following privatization reforms in the Chinese aluminium and cement industries, both of these sectors grew at an amazing speed thanks to the then innovative business model and bold reform methods. Weiqiao, Xinfa, East Hope and Shanshui Cement are all brilliant success stories: they started off from precarious small production plants to grow into industry giants, contributing hefty amounts of taxes to local governments and generating employment for inhabitants of less developed regions.

Weiqiao Group, which started as a state-owned company suffering financial difficulties, has since been transformed by its CEO, Zhang Shiping, into the largest aluminium company in Shandong. In the cities and villages where Weiqiao aluminium plants have been built, nearly every family has a member employed by the company. The Weiqiao Model, in which aluminium companies stay independent from China’s centralised electricity provision, has been successful in providing low cost electricity to its aluminium plants as well as to people living in the area.

Xinfa, another example of a Chinese aluminium pioneer, has a similar success story. Zhang Xuexin, the CEO of Xinfa, successfully transformed a small electricity plant with only 200 workers into a large-scale aluminium conglomerate with 148 billion RMB in total assets.

In the cement industry, Shanshui Cement has transformed itself from a state owned company that performed badly for a long period to a private company that fast tracked its development. The company was set on this path with the reforms and leadership of Zhang Caikui, the formerly dubbed “good leader of a State Company”.

All these companies have thrived because of their courageous reform measures during the golden moment of Chinese economic development.

Unfortunately, the environmental problems of these companies will definitely continue to hamper their long-term development. According to statistics, Xinfa has annual CO2 emissions of more than 56 000 kt and in 2013 a large number of Chinese official media reported on its heavily polluting production methods that have led to a deteriorating environment around its production plants.

In 2014, a production project owned by East Hope became the complaint of the inhabitants of the village where the company’s production plants were situated. Journalists found that the plant’s industrial waste was being disposed off too close to resident’s homes without any warning, resulting in dangerous pollution for the population. This company emits nearly 37 000 kt of CO2 per annum.

In 2014, Shanshui Cement was forced by the government to tackle their pollution problems, especially the emission of NO2, which is 8 times higher than the standard level. In January 2016, Shanshui was criticized by the government for not stopping their production during the winter, when air is more easily polluted.

The underlying factor behind these environmental scandals traces its way back to the development of these companies, based on the “pollute first, clean up later” approach. Many of these companies launched their projects before receiving government permission, meaning they were not subject to any environmental reviews or regulations. Under this context, a significant amount of heavily polluting coal-fired plants were built. To make matters worse, the majority of Chinese aluminium production plants followed the “Weiqiao Model”, which meant building their own small and heavily polluting electricity plants to feed their aluminium production, rather than using the country’s centralized electricity system. While the Chinese government may have closed it’s eyes to such polluting methods in the past, today such activities can no longer be considered sustainable as environmental problems in China become more acute.

At the start of 2015, China introduced its most severe environmental law yet, which imposes harsher punishments and sets higher standards for polluting companies. For example, emitting more than three tons of dangerous substances will result in criminal charges for a company’s managers.

In 2016, the Chinese economy entered a new development phase, which requires China’s heavy industry to undertake reforms and decrease their production size. In February 2016, the Chinese government announced its plan to curtail 500 million tons of coal production. Both the Chinese aluminium and cement industries depend heavily on coal and will now have to significantly reconsider their strategy. They comprise of the input side of China’s economy, and are now facing the double challenges of environmental compliance and the country’s economic slowdown.

These companies have now begun to invest heavily in order to reform their polluting production methods. For example Xinfa Group has invested a great amount of money to make its production green after the pollution crisis. Weiqiao has also reduced the amount of its small electricity plants. While these should be considered welcome initiatives, it is also a mere attack on the symptom rather than the cause of pollution: investment into cutting pollution will potentially heighten the cost of production and thus limit the competitiveness of these companies. Therefore, they should instead shift to more intelligent production methods, with the aim of transforming the supposed loss in cutting pollution into new environmentally friendly and financially sustainable business models. Chinese cement and aluminium companies are now facing both challenges and opportunities: if they are able to grasp the opportunity to upgrade their mode of production, they will achieve yet another development leap in the next period, if they stick to their old production methods, they will eventually be left behind in the old era of Chinese development.