There's Big Trouble Down At The Mill


What do a murdered steel works manager, a mass protest and an imprisoned Rio Tinto executive have in common? They’re all threads in the complex web of power, intrigue and corruption surrounding China’s steel industry.

On 14 January this year, the Chinese Government announced a plan to consolidate the steel sector and to strengthen China’s bargaining power with international mining conglomerates. No one predicted how spectacular the fallout from this plan would be — the last two months alone have seen riots, murder, detentions and a very public souring of Sino-Australian relations.

Long-standing state ownership of China’s steel sector has resulted in a highly fragmented industry that suffers from gross overproduction. According to the Chinese state newsagency Xinhua, last year the nation’s steel output exceeded domestic demand by around 200 million metric tons — this at a time when international demand for steel is weak in the face of global economic downturn. To make matters worse, the cost of production has steadily risen because mining firms like Rio Tinto have taken advantage of the disunity of China’s steel industry to steadily push up the price of iron ore — a vital ingredient in steel production.

The obvious solution for China is to cut output, but this is easier said than done. The People’s Republic has the world’s largest steel industry and wholesale cuts could seriously threaten social stability by creating mass unemployment. The Government’s response to the global financial crisis is illustrative in this regard. Domestic consumption of consumer goods remains weak in China, mainly because average incomes are still low. So while some of the Government’s RMB 4 trillion (around AU$700 billion) stimulus package announced late last year has been channelled into schemes to promote consumerism, the lion’s share has been spent on infrastructure projects. In a word: construction. The consequent building boom has spurred the steel industry and helped soak up excess output.

Even if the central government wished to scale back the steel sector, the structure of the local industry makes cutbacks difficult. An emphasis on heavy industry in the early years of the People’s Republic saw whole cities created around steel, built up by mostly small, locally run operations. According to Xinhua, China’s top five steel firms account for just 20 per cent of national output, with the remainder produced by a staggering 700 or more tiny firms. Local authorities are reluctant to undermine their own financial and political wellbeing by reducing or closing the operations on which their towns and cities depend. This has led to a situation where the steel-related interests of Beijing and local authorities rarely coincide.

The industry’s fragmented nature also creates myriad other problems, including virtually unenforceable environmental standards and gross inefficiency. The biggest headache for the central government, however, has been the lack of a united front when it comes to negotiating iron ore prices.

Officially only a handful of the biggest steel firms and traders are allowed to import ore at contracted benchmark prices. Smaller firms have to pay much higher spot prices or else purchase marked-up ore from official importers. Mining companies like Rio Tinto have been short-circuiting the system by offering ore directly to smaller operations at benchmark levels — a good deal for small producers, but a practice that fatally undermines the nation’s overall bargaining power. The net result: skyrocketing iron ore prices.

In the months leading up to the arrest of Australian Stern Hu and three other Rio Tinto employees, Beijing attempted to crack down on "unauthorised" iron ore trading and make the Chinese Iron and Steel Association (CISA) the nation’s sole negotiator with foreign mining firms. Rio Tinto, however, was able to forestall CISA’s efforts to extract a 40 per cent cut in iron ore prices — allegedly through possession of detailed industry data and inside information on CISA’s bargaining strategies. Hu’s arrest was a signal not only to mining companies, but also to corrupt officials within China, that Beijing had had enough.

Alongside these games in the corridors of power, equally fraught situations have developed on the ground, as the Chinese Government has attempted to streamline the steel industry through amalgamations and privatisations. A key player in these moves has been the State-Owned Assets Supervision and Administration Commission (SASAC), the body charged with ensuring worker entitlements are protected and market prices are paid when public assets are sold. The reality, as the Hong Kong-based NGO China Labour Bulletin noted recently, is that SASAC officials are frequently bought off and let state-owned firms go for rock bottom prices. Workers are almost never consulted, let alone protected. The rigorous suppression of independent trade unions means employees have virtually no legal defence against corrupt officials and profit-driven private firms.

In these circumstances, it’s not surprising that workers are nervous when mergers and sell-offs are announced, as Chen Guojun discovered when he was beaten to death by infuriated employees of the Tonghua Iron and Steel Group in northeast China on 24 July. The precise circumstances of Chen’s death remain hazy, but reports concur that he had just taken over as general manager of Tonghua after his employer, the privately-owned Jianlong Group, procured a majority stake in the state-owned mill.

On 24 July workers began gathering at the Tonghua plant, fearful of what a Jianlong takeover would mean for their jobs. According to an article in the China Daily, Chen inflamed an already tense situation by threatening to lay off 8000 workers. When employees physically expressed their displeasure, he reportedly told them, "If you do not kill me today and let me live, I promise you will not even get a bowl of vegetable soup to drink."

It seems Tonghua employees took him at his word — Chen was cornered in a dormitory and severely beaten. Police and medics were prevented from reaching him until late that night, and he died. Jianlong’s takeover of Tonghua has since been cancelled.

Just weeks after the murder at Tonghua, workers at the Linzhou Iron and Steel Company in Anyang, central China, took an official hostage when it was announced the plant would be privatised. No doubt mindful of Chen Guojun’s fate, the provincial government quickly backed down from its privatisation plan.

This extraordinary train of events illustrates the immense task confronting Beijing as it attempts to balance the conflicting demands of workers, the national economy, and provincial authorities. It doesn’t help that many of the steel industry’s underlying issues — endemic corruption, the absence of legal frameworks to resolve grievances, an economy distorted by years of central planning — are products of an authoritarian one-party rule the government shows no signs of relaxing. As things stand, some reductions in iron ore prices have been achieved, but at considerable diplomatic cost. The steel industry remains diffuse and disunified. It remains to be seen whether further consolidation can be achieved in the face of violent worker resistance.

New Matilda is independent journalism at its finest. The site has been publishing intelligent coverage of Australian and international politics, media and culture since 2004.