Sino-Japanese ties stumble over Shanghai steel project

The Baoshan steel mill in Shanghai is an example of grandiose projects that have turned into frustrating economic problems between China and Japan. To many chinese, Baoshan is the symbol of a leftist holdover from the days fo the Cultural Revolution -- a huge, costly undertaking unsuited to the country's backward technology and severely limited financial means.

Baoshan was roundly criticized at the National People's Congress last fall and continues to be criticized by Shanghai citizens as an example of wasteful and polluting capital construction.

For the record, the Japanese have said little. Nippon Steel, the world's largest steelmaker and the principal contractor for the building of Baoshan, is in a particularly delicate position, awaiting the outcome of talks between the Chinese and Japanese governments on new loans to cover construction costs not only for Baoshan but for several other large petrochemical projects involving Japanese companies.

In private, however, Japanese sources in Tokyo and Peking contend that the original plan for Baoshan made sense both in terms of China's needs and of the costs involved. The Baoshan story goes back to November 1977, a year after the fall of the "gang of four" headed by Mao Tse-tung's widow, Jiang Qing.

Deputy Premier Li Xiannian, a close associate of the late Premier Chou En-lai , had once asked Yoshihiro Inayama, then chairman of Nippon Steel, to help China achieve Premier Chou's longtime dream of a new seaside integrated steel mill.

Mr. Inayama responded with enthusiasm to the request, and by December 1978, after several Japanese missions had commuted between Peking and Tokyo, the basic contracts were signed. Baoshan was to be an integrated steel mill, the latest in modern technology, producing 6 million tons of steel per year, with two blast furnaces, a seamless tube plant, and hot and cold rolling mills.

Besides the Japanese (principally Nippon Steel, but including Mitsubishi, Hitachi, and others), West German firms also signed substantial contracts.

Construction was to be in two stages. In the first stage, one blast furnace, a slabbing and blooming mill, coke ovens, a sinter plant, and a seamless tube plant were to be built, as well as a power station producing 700,000 kilowatts of electricity.

In the second stage, a second blast furnace and hot and cold rolling mills were to be installed. The first stage would see production of 3 million tons of steel; the second stage, another 3 million tons. The first stage was to be completed by August 1982; the second, early in 1984.

Nippon Steel figured that total costs of imported machinery and equipment would come to about 940 billion yen (around $4.7 billion). adding another 30 percent or so as local construction costs, total would come roughly to $6 billion, or about $1,000 per ton. American sources say that a new plant in the US today would cost from $1,500 to $2,000 per ton. Chinese estimates presented to the National People's Congress in September calculated total costs at 22.7 billion yuan (about $15.13 billion).

Japanese sources say the discrepancy may be due partly to higher-than-expected local construction costs and partly to Chinese valuing the yuan at 2.8 to the dollar instead of 1.5, the rate prevailing during the congress.

By January of this year, 40 percent of the building of the first stage was complete. All the foundation work had been finished; buildings were beginning to rise and to house the machinery that was arriving from Japan.

Then the ax fell. The Chinese formally notified the Japanese that they were canceling the second stage. There would be no hot and cold rolling mills, and only one blast furnace.Production would be 3 million tons, not 6 million.

Japanese protested that 6 million tons was the smallest economic size an integrated steel mill of world caliber could expect to be. In addition, a single blast furnace meant unstable production.

The Chinese responded that they knew this, but could do nothing. Capital construction costs were being severely cut back all around the country, and there simply was no money to finance the second stage.

Since then construction has proceeded fitfully. Nippon Steel, most of whose contracts covered the first rather than the second stage, seemed to be in a somewhat better position than its Japanese collea gues or the West Germans.