Struggling from weak demand and facing new rules to clean up pollution, some firms in China's top steel producing city have scaled back production or even closed completely, lifting local steel prices off 20-year lows.

China is using tougher environmental rules to help tackle a severe steel capacity glut that has depressed prices and saddled much of the sector - the world's biggest - with crippling debt.

Tangshan, which is 200 km east of Beijing and produces more steel a year than the United States, has been on the frontline of campaigns to cut smog and tackle overcapacity.

The city has pledged to reduce its annual crude steel capacity by 28 million tonnes from 2013 until 2017, roughly a fifth of its total, and its steel firms are now being forced to undergo costly upgrades.

"There are so many plants that are having to cut or stop production," said Zhou Junjia, a sales manager at Baifeng Iron and Steel Corporation, noting that four privately owned steel firms nearby had recently been forced to close. "In Tangshan, there are just too many plants selling steel products. We travel around to customers and to big steel markets in other large cities and no one is buying," added Mr Zhou.

Baifeng has cut daily crude steel production by 40 per cent to 1,200 tonnes in recent months, which would amount to an annual cut of 292,000 tonnes. "We are at least not losing money and are covering our production costs," he said, noting that it could break even by relying on its processing and trading business.

The premises of Kailida Iron and Steel, a private producer located nearby, appeared to have been abandoned and attempts to reach staff failed with their phone lines disconnected.

In the nearby township of Fengnan, the Qingquan steelworks closed in late 2013 for what staff said was a temporary shut down after it was unable to pay its workers.

While guards remain outside the plant, operations have not yet resumed more than a year and a half later.

Tangshan, located in Hebei province, is making industrial firms - including steel mills - renovate facilities over the next few months in order to meet strict new pollution standards.

Mills in areas surrounding Beijing will also have to reduce output from Aug 20 to Sept 3 to help air quality as the city commemorates the 70th anniversary of the end of the Second World War.

According to a survey published this week by the Hebei Province Metallurgical Industry Association, as many as 26 blast furnaces in Tangshan have been closed from July for overhauls, and a "majority" of steel processing plants throughout Hebei have either shut down or halved production due to persistently weak prices and environmental pressures.

The cut backs are already having an impact on local steel prices, with steel billet in Tangshan MYSTL-Q235-FTAN rising by 12.6 per cent to 1,880 yuan per tonne since hitting a low of 1,670 yuan on July 8, according to data provider Mysteel.

Xue Heping, a China Iron and Steel Association (CISA) analyst, warned against "blind optimism" but said in a report that "the worst period for the steel market is already passing." However, prices in Tangshan remain more than 12 per cent lower than the start of the year and 30 per cent down from August 2014. CISA's composite price index is some 37 per cent lower than the reference prices set in 1994.

Jiang Ping, an analyst with ChinaTSI, an industry consultancy, said expectations of tougher environmental controls and supply cutbacks were helping prices. "But I don't think there is any long-term support for prices because none of this solves the fundamental issues of overcapacity and weak demand," she said.(source from Reuters)

• [Editor:Juan]