BEIJING (Reuters) – China’s top steel maker Baowu Group is studying plans to relocate blast furnaces from remote Xinjiang to Cambodia in a bold example of China’s heavy industry shifting excess capacity overseas, a source familiar with the firm’s plans said.

The move, which would mark Baowu’s first overseas production, shows the lengths Chinese steelmakers are prepared to go to maintain output levels despite Beijing’s drive to cut industrial slack in the mainland.

Baowu is looking at the feasibility of shipping two blast furnaces, with a combined capacity of 3.1 million tonnes, along with two converters to turn iron into steel, to Cambodia in late 2019, a senior Baowu manager involved with the plan told Reuters.

The manager declined to be named as he is not allowed to talk to media. Baowu did not respond to emails seeking comment.

China has shut more than 150 million tonnes of steel capacity in the past three years as part of a campaign to modernize its economy, but still accounts for half of global output, with capacity of 980 million tonnes a year.

The equipment to be moved would come from Xinjiang Bayi Nanjiang Steel Baicheng Co Ltd, a Baowu subsidiary based in Aksu in far northwest China. The plant was shut in 2017 and sits some 4,000 km (2,480 miles) from the Cambodian capital of Phnom Penh.

“This equipment may be seen as outdated in China, but it is still quite advanced in Cambodia,” the manager said.

GRAB FOR GROWTH

Analysts said establishing a steel industry in Cambodia – either shipped in or newly built – will present challenges.

“It would be very difficult to set up steel mills in Cambodia, given their lack of infrastructure like railways and utilities, and a noncommittal investment environment,” said Ming He, analyst at Wood Mackenzie in Beijing.

However, Baowu is hoping to cash in on a local construction boom.

Cambodia, which imports all its steel needs, is rapidly urbanising, building major infrastructure projects including ports, freeways and residential and commercial properties.

It posted GDP growth of 7.3% in 2018, making it the world’s sixth fastest-growing economy, according to the IMF.

Cambodia’s Commerce Ministry, did not respond to a Reuters request for comment.

“Since Chinese investments are driving the construction boom in Cambodia, it seems natural that Chinese investors will also find it beneficial to set up a steel plant to cater to this demand,” said Arshiya Sibia, an analyst at CRU in Singapore.

However, moving blast furnaces and other large equipment from China’s remote northwest interior all the way to southern Southeast Asia in a cost-effective way will be a challenge.

It’s rare for Chinese mills to relocate actual steel-making equipment to other countries, apart from those who sneaked out banned small-scale induction furnaces after Beijing’s crackdown on low-grade steel in 2017.

Given the sheer scale of some of the equipment — blast furnaces can weigh thousands of tonnes — the most likely route will be by train to China’s east coast, and then by ship to southern Cambodia, a journey of more than 6,000 km, analysts said.

OFFSHORE ALTERNATIVES

Baowu is also weighing other locations.

“Cambodia is a preferred option … But we also have a back-up plan of moving them (the furnaces) to Pakistan,” said the Baowu manager.

The firm is also looking into expansion in Chile, he added.

A move offshore would see Baowu would join other Chinese firms that have expanded by buying foreign assets or setting up joint-ventures with overseas partners to maintain or expand overall production.

Tsingshan Stainless Steel, the world’s top stainless steel maker, will produce nearly 30 percent of its total stainless steel capacity in Indonesia this year, while another 10 Chinese firms have set up joint steel ventures in Indonesia, according to company statements.

In January, HBIS Group, China’s no.2 steelmaker, said it will buy Tata Steel’s assets in Thailand and Singapore with a combined annual capacity of 3.7 million tonnes.

Baowu’s listed arm Baoshan Iron and Steel confirmed last month it had formed a special team to look at steelmaking bases overseas.

“(We) aim to make a breakthrough within three years,” Baosteel’s chief financial officer Wu Kunzong told an earnings conference call.