Devil is in the details of China's new energy-cutting drive

BEIJING Aug 10 (Reuters) - There might be less than meets the eye to Beijing's demand that more than 2,000 companies close down obsolete, energy-guzzling plants by the end of next month.

On paper, the order given on Sunday raises the spectre of a sharp cut in industrial output growth, even as the robust economy shows modest signs of cooling.

In practice, several firms on the government's black list said they had either already shut the offending facilities or were planning new, bigger replacements.

Tianjin Tiangang United Steel Corp has two furnaces on the list of 2,087 factories targeted for closure by the Ministry of Industry and Information Technology (MIIT) as part of a government drive to meet its energy-intensity goals.

But a manager who gave only his surname, Wu, said the firm had already dismantled the two furnaces in 2009 and built two new larger ones in their place.

"Any furnace with capacity above 400 (cubic metres) is in line with state policy," Wu told Reuters.

Under its five-year plan that runs out at the end of 2010, China wants to reduce the amount of fuel that goes into each unit of economic output by 20 percent. It is already the world's second-largest consumer of oil behind the United States.

Energy efficiency improved nearly 16 percent in 2006-2009, but then stalled. In the first half of 2010, China used 0.09 percent more energy per unit of gross domestic product, prompting Premier Wen Jiabao to demand an all-out effort to meet the goal. [ID:nTOE67206L]

Ren Aimin, owner of the Xinyuan Iron Plant in the northern province of Shanxi, also has a furnace on the list drawn up by MIIT.

It, too, is already long gone.

"My plant went bust, and the furnace was dismantled in January," Ren told Reuters.

EXCESS CAPACITY

In the adjoining province of Shaanxi, Dragon Steel Group is under instruction to close three small furnaces.

One is already shut and the other two will follow soon, said Wang Yuhan, a production manager.

But there is a catch. Dragon Steel is building four larger furnaces, each with capacity of 1,280 cubic metres.

"Two of them have already started production and another two are under construction," Wang told Reuters.

Depending on how efficient it is, the new plant could improve China's energy consumption. But the expansion will exacerbate a related problem of excessive capacity in an array of heavy industries, including steel.

The story is the same at Changjiang Steel, a private producer in central Anhui province with two furnaces on the black list.

A company official, who declined to be identified, acknowledged that the furnaces were still operating. But he said they would close, regardless of Beijing's orders, once new furnaces now under construction were ready.

Maanshan Daily, an official Anhui newspaper, reported earlier this month that Changjiang Steel was building three new furnaces to give it annual capacity of 2.7 million tonnes of iron and 3 million tonnes of steel products.

Apart from the questions it raises about China's energy targets, the string of stories shows the difficulties the central government can encounter in implementing economic policy.

Local authorities are particularly reluctant to apply the brakes to capital investment, a rich source of revenues and jobs.

However, in a show of strength in 2004, the central government stepped in to halt a huge steel plant being built in Jiangsu province by a private firm called Tieben.

The head of the company was jailed and local government officials were punished to underscore Beijing's determination to reduce over-capacity in the steel sector.

By 2009, China's total crude steel output had reached 567.8 million tonnes, up from 272.5 million in 2004.

China's vast manufacturing sector shrank in July for the first time since the global downturn in March 2009 as government steps to slow bank lending and property speculation hit home, according to a recent HSBC survey. But economists have played down the risk of a serious economic slowdown. [ID:nTOE67103Z] (Editing by Kim Coghill)