China's clean-air push transforms industry

The great Chinese environmental cleanup, now in full swing, is shifting the corporate landscape in unexpected ways and even stoking inflationary pressure that may soon be felt in supply chains worldwide.

As President Xi Jinping's government intensifies the fight against the country's pollution problem, companies are scrambling to adapt to tighter regulation while investing in cleaner energy. In industries from steel to textiles and consumer goods, the resulting shakeout has left the survivors with far more pricing power. That in turn is reinforcing the already-resurgent factory prices that contribute to global inflation.

These trends are reshaping the business environment, according to Cui Li, Hong Kong-based head of macro research at CCB International Holdings Ltd.

"The environment cleanup is and will be a key driver of the industrial consolidation," said Cui, who expects to see greater concentration in steel, paper-making and pharmaceuticals. "With costs rising from wages, land and pollution curbs, China's manufacturers will have to invest and upgrade to survive. Those who survive will benefit."

Take He Wenyong, manager of a midsized textile company that has supplied Walt Disney Co. and its license holders. Amid a forced switch to natural gas from coal in his industry, the company, Shenzhen Yabi Textiles Co., is benefiting from past investments and eating up the market share of smaller competitors that couldn't foot the bill.

Speaking at Guangzhou's trade fair earlier this month, He said his company is now able to raise prices by 8 percent. "Those small, messy factories took up a third of market share," said He, at a booth at the fair filled with merchandise such as beach towels inspired by the Frozen film franchise. "Now that they're gone, everything is much better for us."

"Greater competition for skilled labor and the resultant rise in factory wages are also causing significant cost pressure," he said. "While we've seen a number of factories closing down, the closures generally involve smaller factories that lack the scale and resources to meet the more stringent environmental controls."

The shakeup began in heavy industries in 2016 as the government closed outdated or illegal steel mills, coal mines and aluminum smelters in a shock therapy strategy to reduce excessive capacity and curb pollution. Such measures powered a more-than 20 percent jump in global metal prices from the start of the year, and led to consolidation in the nation's sprawling steel industry.

Business on 11/21/2017

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