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Olympic Pollution Controls Cost Chinese Industry

By JOE McDONALD 07.29.08, 1:46 PM ET –

BEIJING – Factory shutdowns and other industrial restrictions intended to help reduce Beijing’s eye-searing smog for the Olympics are making business more complicated – and costly – for Chinese providers of steel, pharmaceuticals and other goods and services.

The financial impact of the disruptions is hard to estimate and China’s exports should not be greatly affected, because suppliers had months to prepare, analysts and company representatives said.

Still, manufacturers have spent extra to produce and warehouse supplies ahead of the games, or to arrange special transport. These costs come on top of the $40 billion the government is spending on Olympics venues and improvements to Beijing’s infrastructure.

Businesses across China also are reeling from a government decision to tighten security screening of applicants for both business and tourist visas.

Some tourists have been blocked from traveling, while others simply have been turned off. Upscale hotels, many of which went through costly renovations for the Olympics, have been half-empty in the past three months. Industry executives say it is the worst slump since a severe pneumonia outbreak that jumped from China to the world.

“It is almost as bad as 2003, when SARS broke out,” said Matthew Lin, director of Bravo Tours China in Shanghai, where he said business is down 30 percent. “Many foreigners canceled their trips or didn’t bother to come.”

Ordered to shut down its blast furnaces to help clear the air for the 10,500 athletes and 500,000 tourists expected for the games, steel producer Beijing Shougang Group embarked on a massive effort to ensure its customers would not be affected. The company, a key supplier to China’s booming construction industry, ramped up output in the first half of the year so it could fill orders during the shutdown, and it shifted some production to a mill outside Beijing.

Once the games and then the Paralympics end in late September, Shougang will ramp up production in the final quarter, said a manager who asked not to be identified by name because he was not authorized to talk to reporters. Shougang’s press office refused to confirm details of its plans.

Shopkeepers and manufacturers throughout Beijing will suffer from rules that ban trucks from the Chinese capital, making deliveries more costly or impossible. They will have to cut operations or pay sharply higher prices to move goods by van. The city already has banned 300,000 older trucks and other vehicles since July 1.

While Daimler AG can keep making Mercedes-Benz sedans at its Beijing factory because its emissions are below government limits, managers worry about getting parts delivered, said Daimler spokesman Trevor Hale.

“We’ve tried to make sure our logistics providers all have those `green’ trucks, but we’re trying to be flexible,” Hale said. “We have a little bit more inventory than we did in the second quarter just in case.”

The controls also are disrupting less-visible industries such as pharmaceuticals, where China is a major supplier of materials such as penicillin used by global producers for drugs sold in the United States, Europe and elsewhere.

“The supply of some raw materials was indeed affected by restrictions during the Olympics,” said Xu Xiaofang, a spokesman for GlaxoSmithKline (nyse: GSK – news – people ) China. “Since we were informed about the restriction in advance, we have stored appropriate supplies.”

Xu declined to say what materials GlaxoSmithKline sources in Beijing or how much it cost to prepare for the supply interruption.

Pollution controls will require more than 150 steel, petrochemical and other industrial facilities to suspend production for the games, the official Xinhua News Agency reported, citing Zheng Jiang, vice chairman of Beijing environment bureau.

The interruption of steel production is expected to have little effect trade because most of Beijing’s output goes into construction, said Linda Lin, a Shanghai-based analyst for the industry newsletter Metal Bulletin. She said only 15 percent of China’s steel production last year was exported.

“July and August are the low season for steel. The market in north China can’t digest all the backlog anyway,” Lin said.

Some last-minute rule changes came with no warning.

Foreign companies complained this week after a surprise announcement that the government was further tightening restrictions on business visas after suspending the issuance of multiple-entry visas in March. Especially hard-hit will be foreign entrepreneurs in Hong Kong who need to visit mainland suppliers of garment, toy or furniture factories.

“The introduction of such restrictions without warning creates serious problems for companies operating in China,” the European Chamber of Commerce in China said in a written statement.

At Bravo Tours China in Shanghai, managers plan to use the lull for staff training, Lin said, “and preparing for the business comeback after the Olympics, hopefully.”

Associated Press Writer Bonnie Cao in Beijing contributed to this report.

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