MANILA/BEIJING, Sept 26 (Reuters) - China's biggest steel makers have rarely had it so good.
After decades of badgering by Beijing to consolidate and get cleaner, the country's top state-owned producers are passing emissions and efficiency tests that their smaller, private counterparts are now largely failing.
Many small steel companies are being forced to curb or shut operations for extensive inspections as part of stepped-up efforts by Beijing to combat air pollution.
As a result, China's steel majors have been able to crank output to record levels and enjoy the best operating margins in over seven years.
The inspections are part of a years-long drive to clear China's skies of toxic air and rid its industrial landscape of excess capacity by forcing metal producers and other heavy industry to modernize, merge or shut down.
The efforts appear to be paying off for the country's biggest so-called national champions.
Baosteel, which last year became China's top steelmaker after acquiring a smaller rival, Wuhan Iron and Steel, posted its best first-half net profit in five years of 6.17 billion yuan, up 78 percent from the year-earlier period.
Other big steelmakers, like Hesteel and Maanshan Iron and Steel, saw January-June profit more than triple. Maanshan's share price has nearly doubled this year.
The campaign "might be fully legitimate but the result seems to be more benefiting the SOEs and the smaller ones are taking the hit," said Daniel Meng, analyst at CLSA in Hong Kong, referring to state-owned enterprises.
From January to July, steel output at big mills increased 7.5 percent and those at small producers dropped 2.1 percent, the China Iron and Steel Association said in August.
China aims to put at least 60 percent of its steel capacity in the hands of its 10 biggest companies by 2025, and has encouraged acquisitions and mergers. Its anti-smog campaign has provided another route to get there.
Sulphur is the most common pollutant from making steel, found in iron ore and coking coal, the main raw materials used in making the metal. China has required steel plants to install facilities to reduce emissions of sulphur.
These facilities cost millions of yuan to install and millions more to operate. Jiangsu Yonggang, a private, midsize mill in Zhangjiagang in southern Jiangsu province, spent more than 100 million yuan on such facilities in 2011, a company official said.
Running costs range from 50 to 100 yuan per tonne, Meng of CLSA said. For an 8-million-tonne steel plant, the annual cost could run up to 800 million yuan.
This is why many mills did not use the emissions-cutting facilities despite installing them years ago, Meng said. But all have now turned them on to avoid being shut permanently.
Mills located in northern China will be closed if they fail to meet emission standards by Sept. 30, according to the Ministry of Environmental Protection, whose army of inspectors have intensified checks on the companies.
"The inspections are much more rigorous than previous years," said a senior manager at a state-owned mill in Shandong province. "Authorities are sending more teams to the mills more frequently. They don't give you any notice in advance and only carry out surprise checks."
He said "private-owned mills used to not care about emissions, so they didn't invest on environmental equipment so their products are more competitive in terms of prices."
But as China clamps down on environmental offenders, the smaller mills have been hit.
China has shut more than 600 steel mills producing low-grade construction steel as of the end of June, accounting for total capacity of 120 million tonnes, according to the state-owned China Economic Daily.
In June, China said it had reduced its total steel production capacity by 42 million tonnes, meeting 85 percent of its full-year target.
China said the capacity cuts in the steel and coal sectors meant that 726,000 workers were "reallocated" last year. It expects to do that for another half a million workers this year. Beijing set up a 100 billion yuan fund last year to help laid-off coal and steel workers and spent more than 30 billion yuan of it in 2016.
"It's more difficult for small mills to cope with stricter environmental rules because they don't have enough capital to invest," said a trader who sells iron ore to southern mills.
He requested anonymity because he was not authorized to speak with media.
That challenge has intensified as steel prices in China retreat after a rapid rally this year that lifted profit margins of some producers to their highest levels in years. Shanghai rebar steel futures have dropped 14 percent from 4-1/2-year highs reached in early September.
"China's looking to restructure the industry into a much more efficient and sustainable one over the longer term and that means cutting less efficient capacity, replacing it with new technology and less polluting operations," said Daniel Hynes, a commodity strategist at ANZ.
Reporting by Manolo Serapio Jr. in MANILA and Muyu Xu in BEIJING; Editing by Philip McClellan