Andy Hoffman Asia-Pacific Reporter,

Caofeidian, China — Globe and Mail UpdatePublished on Monday, Aug. 09, 2010 1:11PM EDTLast updated on Monday, Aug. 09, 2010 7:43PM EDT

Amid an ugly, sprawling stretch of razed land in this developing city rises a hulking new facility that represents the future of China’s steel industry.

The Shougang Jingtang United Steel Co. Ltd. mill ranks among the largest steel plants ever built in China and uses state-of-the-art technology that not only improves efficiency but keeps carbon emissions to a minimum.

The Caofeidian mill is just the kind of modern facility that China hopes will provide the steel needed to fulfill its massive infrastructure construction plans over the next decade. And for the country’s thousands of small, dirty and inefficient steel producers, the Caofeidian plant stands as a reminder that their days are numbered.

In a surprise move, China ordered more than 2,000 steel, cement and other energy-intensive factories be shut down by the end of September. The heavy-handed decree offers evidence that the central government is serious about abolishing its inefficient, power-hungry factories, despite the potential to hinder economic growth and create a backlash from powerful local officials.

The unprecedented order is aimed at reducing China’s energy consumption and its growing reliance on foreign oil as well as shifting its booming economy toward modern production methods that are less harmful to the environment. While lifting hundreds of millions of its citizens out of poverty, China’s economic ascendance has also caused major ecological damage that the government hopes to contain in order to set the stage for the country’s next phase of development.

Li Yizhong, China’s Minister Of Industry And Information Technology, called the 2,087 plants and factories identified in a government document “outdated polluters” and safety risks.

“They reflect the very crude and quantitative mode of economic growth,” Mr. Li said, according to state-controlled newspaper China Daily.

“They are also the cause of the low quality, inefficiency and weak competitiveness of our national economic development,” the minister said.

The ministry published a list this week that names the offending companies that must comply with the order or risk losing access to bank loans, electricity and government approvals for new projects. The plants ordered closed come from 18 industries including iron, steel, coke, metals smelting, paper production, cement and leather making.

Some Chinese companies will be particularly hard hit. According to the order, Liuzhou Iron and Steel Co. Ltd. will need to cut two million tonnes of inefficient iron production.

Due in part to its heavy reliance on coal-fired electricity and its rapid industrialization, China is the world’s largest emitter of carbon dioxide and other greenhouse gases. It recently surpassed the United States as the world’s largest energy consumer, according to the International Energy Agency, although Beijing disputes the Paris-based agency’s findings.

Despite its goal of keeping the country’s annual economic growth at more than 10 per cent, the order suggests China’s central government is also committed to reducing energy consumption and greenhouse gas emissions. Demand for construction materials such as steel and cement has spiked in 2010 following a massive government stimulus package worth more than $550-billion (U.S.) aimed at keeping China’s economy growing in the wake of the global financial crisis. The order to close the inefficient factories is designed to help the country meet its goal of improving energy efficiency by 20 per cent in 2010 compared to levels five years ago.

In the past, local government authorities have been reluctant to follow through on Beijing’s orders to close dirty plants because of job losses and the negative impact on economic growth. Local official’s compensation and performance evaluation are tied to GDP growth; however, China’s Communist Party recently introduced environmental targets to supplement GDP performance when assessing the potential promotion of local officials.

Just last week, China’s National Development and Reform Commission said it had ordered 22 provinces to stop providing electricity at discounted rates to high-energy consumption industries such as aluminum.

James Miller, professor of Chinese religion and environment at Queen's University, said the tension between economic growth and environmental concerns have long been a major issue for Chinese policy makers.

“Closing down these factories is a sign that things have shifted in favour of the environment,” he said.

China has offered billions of dollars in incentives for companies to develop so-called green energy technologies such as wind and solar power. However, the country’s massive population of 1.3 billion people, rapid economic growth and rising industrialization have made achieving its ambitious environmental goals extremely difficult.

China managed to reduce energy intensity by 14.4 per cent by the end of 2009 from 2005 levels, but recently said energy intensity had increased 0.09 per cent in the first half of 2010.

“China has to create some form of economic development that is much more environmentally sensitive than the pattern that the West has followed. This is uncharted territory. Nobody has managed to do this before,” Mr. Miller said.

Na Liu, founder of CNC Asset Management Ltd., an investment firm focused on Chinese equity markets and global raw materials, said the fact that the government published a detailed list of the plants it wants shut down shows it is “more serious” about tackling the issue.

The measure comes as the administration of President Hu Jintao and Prime Minister Wen Jiabao are pushing a raft of social reforms including affordable housing, health care and education to counter the ill effects of China’s economic ascendance to the world’s second-largest economy.

“It is undeniable that most of these reforms will be viewed as left-leaning by the market and will likely hurt near-term corporate earnings for some cyclical sectors ... in the longer term, these reforms are essential for the sustainability of the Chinese economic growth and the stability of the Chinese society,” Mr. Liu said.