By Ruby Lian and Manolo Serapio Jr
SHANGHAI/SINGAPORE (Reuters) - Chinese steel mills are becoming cleaner every month as Beijing pushes to curb its smoke-stack industries. But they're not getting any leaner.
Despite efforts to step up environmental checks and trim out excess capacity, steel output by the world's top producer has risen year-on-year for the past seven months.
As emissions cuts will mean steel mills are better able to meet stricter government standards, Beijing may find it more difficult to cut overcapacity in a sprawling industry.
For now, domestic demand from infrastructure and construction has been robust, absorbing most of the extra supply. But a steeper slowdown in the world's second-largest economy could force mills to ramp up sales abroad.
That could rekindle tensions with Europe and the United States, major trading partners which have for years accused China of dumping its excess steel overseas, hitting producers and hurting global prices.
The issue took center stage at a recent G20 summit in China when world leaders pledged to work to address excess output.
China's top steel producing city of Tangshan in Hebei province illustrates Beijing's dilemma. Hosting a months-long international horticultural show, Tangshan had a major six-month clean-up to ensure blue skies for visiting dignitaries, including the country's president Xi Jinping.
Industry experts predicted this would see a big drop in output in a province that accounts for a fifth of national production, going some way to realizing government goals on output and capacity cuts.
But production dipped by far less than expected as mills sustained output even as they cleaned themselves up.
They could do this largely because steel prices (SRBcv1) have risen 40 percent this year, and strong domestic demand is expected to continue, underpinning those increases, though exports have fallen to their lowest since February.
By end-September, China had completed more than 80 percent of this year's capacity reduction goals in coal and steel, said Huang Libin, an official at the Ministry of Industry and Information Technology.
China has targeted a cut of 45 million tonnes from its surplus steel capacity this year.
But the battle to tackle excess capacity and curb pollution has failed to dent production. China's annual crude steel surplus is estimated at around 300 million tonnes, three times the annual output of the world's second-biggest producer, Japan.
"If steel mills are profitable, there's no reason for the government to order them to reduce production if they meet environmental criteria," said Xia Junyan, investment manager at Hangzhou CIEC Trading Co in Shanghai.