Rebuilding Costly After Quake

The Sichuan earthquake will drive up demand for steel for rebuilding—which some say will cause massive damage to the environment.

2008-05-23
BOSTON
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As casualties from China’s earthquake keep climbing, experts are divided on the extent of the disaster’s economic and environmental costs.

With at least 51,000 dead and more than 288,000 injured, China
has focused on caring for survivors. The government has
allocated nearly 14 billion yuan (U.S. $2 billion) and received
donations of over 21 billion yuan for relief from the
disaster that struck Sichuan province May 12.

 Government housing officials say that over 4 million homes have been destroyed. Reports cite damage to hundreds of dams and power plants, with untold destruction of factories, businesses, buildings, water systems and roads. More than 14,000 industrial enterprises have sustained economic losses of 67 billion yuan, the Ministry of Industry said.

It may be months before official estimates of the damage are complete, but China’s losses could top U.S. $20 billion, Boston-based risk analysis firm AIR Worldwide said last week. So far, the government has ordered 70 billion yuan (U.S. $10 billion) in budget cuts to cover reconstruction costs.

Impact of rebuilding

While the costs are enormous for Sichuan and its citizens,
experts say they are unlikely to make a major impact on
China’s economy as a whole. Compared with a gross domestic
product of nearly 25 trillion yuan (U.S. $3.58 trillion) last
year, the economic losses may amount to only one-half of one
percent of the country’s GDP.

But greater effects could be felt from reconstruction.
Some economists are concerned that rebuilding will rely on
the same construction-related industries that have been
blamed for much of China’s over-investment, energy use, and
environmental damage.

These include steel, cement, glass, and aluminum. Even
before reconstruction, China accounted for 48 percent of all
cement production in the world, according to a study by
the Peterson Institute for International Economics and the
New York-based Rhodium Group last year.

The industries are the country’s greatest consumers of
power and high-polluting coal. Iron and steel production uses
10 percent of China’s electricity alone, the report said.
Although China’s government has tried to rein in the big
industries for the past two years, the reconstruction in
Sichuan is seen as providing a major boost.

Top priority

 “This is going to add to demand pressure in a big way,”
said Gary Hufbauer, senior fellow at the Peterson Institute
in Washington. The need for steel may be particularly great
because of the public outcry over substandard construction in
Sichuan, which is blamed for thousands of deaths in schools
and housing projects.

Hufbauer believes the government will set aside its
energy-saving and environmental goals for the big industries,
making rebuilding its top priority.

“The whole effort now will be to reconstruct, so it’ll be
a big, fresh blast of demand within China and on the world
scene,” he said. “This is a time when environmental issues,
I’m afraid, will take a back seat.”

The effects for the environment, energy and commodity
prices are likely to be felt beyond China’s borders. “For the
next year, I think we can safely say this will be a further
boost in demand for these commodities and push up commodity
prices. That’s what we’ve seen in other big earthquakes in
the past.”

Real-estate investment slowing

But Trevor Houser, a co-author of the China energy study
at the Rhodium Group, sees a more moderate and gradual
effect on the country and its critical energy-consuming
industries, since overall demand is so large.

“Taking the nearly 4 million homes that will need to be
reconstructed over a two or three-year period and looking at
that in light of the 20 million rural-to-urban migrants each
year for which housing and factory or office space needs to
be constructed, I would doubt it will have a meaningful
impact on overall steel or cement demand,” he said.

Houser also argued that real estate investment and
construction growth has started to slow in China, so that the
rebuilding in Sichuan may only serve to pick up the slack.

But Houser agrees that the demand for more steel in
construction could spread throughout China as a result of
what has been learned from Sichuan’s experience with building
collapses.

“It will probably have an impact even beyond Sichuan
province,” he said. “The government has had to answer to a
significant amount criticism over why it was schools that
collapsed and not government office buildings.”

Tougher inspections

Houser said he expects tougher inspections in the future
to see that building projects are using enough steel.

“I think the Ministry of Construction will be more
stringent in enforcement of building codes. In general, that
means more steel and a little less concrete,” he said.

A survey of China’s steel makers found that most expect
demand from reconstruction will rise, but none have made
plans to increase production yet, the official China Daily newspaper said.

Original reporting by Michael Lelyveld in Boston.

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