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Caofeidian -- Construction of Beijing Capital Iron and Steel Group's new steel plant began on Monday in Caofeidian, a small sand spit 220 kilometers east of Beijing.

More than 100 cranes and concrete mixers roared into the site on Monday morning to start work on two 5,500-cubic-meter blast furnaces, shortly after Vice Premier Zeng Peiyan formally announced the beginning of the project.

The 21-square-kilometer new plant of Beijing Capital Iron and Steel Group Co, known in Chinese as Shougang, will be operational at the end of next year and will completely replace Shougang's old facilities in Beijing by 2010 to become the country's largest steel production base.

With an investment of 68 billion yuan (US$8.7 billion), the new company has a designed production capacity of 8.98 million tons of iron, 9.7 million tons of steel and 9.13 million tons of rolled steel a year.

Shougang holds a 51 percent stake in the new company, Shougang Jingtang Steel and Iron Corp., a joint venture of Shougang and Tangshan Steel and Iron Group in the neighboring Hebei Province. The latter holds the remaining 49 percent.

Shougang aims to cut its output by 4 million tons this year and an additional 4 million tons in 2008, said the company's president Zhu Jimin.

He said Shougang would "maintain minimum operations" during the 2008 Olympic Games but will retain a production capacity of 4 million tons.

Shougang produced 12.48 million tons of steel last year, earning it revenue of 87.47 billion yuan (US$11.3 billion). But profits halved, falling by 1.71 billion yuan to 1.65 billion, due to weaker steel prices and higher raw material costs.

Chinese Premier Wen Jiabao has said the country plans to close down backward iron foundries with a total production capacity of 100 million tons and backward steel mills with a total production capacity of 55 million tons between 2006 and 2010.

The output reduction and planned relocation of Shougang are seen as a departure from earlier policies of growth while ignoring the consequences and will help Beijing's government honor its commitments to improve air quality in time for the Olympics.

"It's not a transfer of pollution," said Zhu. "The new plant will adopt new technologies to minimize emission and waste discharge."

An evaluation by the country's environment watchdog shows the new plant will ensure 99.5 percent of the solid waste and 97.5 percent of waste water are recycled.

Zhu said the new plant's energy consumption for each ton of steel will be equivalent to 669 kilograms of standard coal and per unit water consumption will be 3.84 cubic meters, excluding recycled water.

Meanwhile, emissions of dust and sulfur dioxide per ton of steel will be reduced to 0.44 kg and 0.42 kg respectively, he said.

"Caofeidian is surrounded by sea, so pollutants won't amass as easily as they do in Beijing," said Chai Fahe, a researcher with the Chinese Research Academy of Environmental Sciences. "The islet is actually an ideal place for developing the iron and steel industry."

Shougang is widely accused of being a major polluter in Beijing. In 2005, it started to relocate some of its facilities to Caofeidian and the once isolated sand spit is set to become a massive port and industrial zone.

Beijing's environment watchdog says with Shougang's production facilities gone, Beijingers will inhale 18,000 tons less particulate matter a year, the total emission of about 100 average-sized manufacturing enterprises.

While the research and development arm and some non-core business divisions will remain in Beijing, the old Shougang, located 17 kilometers west of Tian'anmen Square, will probably be incorporated into Beijing's urban development to create a "central recreation center" in the western region, said Zhu Jimin.

"Part of the plan is to build an industrial museum there," he said.

By the time its Beijing operations are phased out in 2010, 10,900 workers will have retired, Zhu said. Another 13,000 close to retirement age will retire early.

About 20,000 will move to Caofeidian for non-core businesses, while Shougang will provide training to the remaining 21,200 to help them find new jobs - one third of them have already completed the training, he said last week during the ongoing annual parliament session.

Zhu, a deputy to the National People's Congress, said his company plans to fully list its assets before the end of 2010.

"The listing is one of our future goals," said Zhu, without mentioning which specific stock market the company is targeting.

Shougang Group currently has one subsidiary listed on the Shenzhen Stock Exchange and four on the Hong Kong market.

The Group has been restructuring and optimizing its Hong Kong-listed companies focused on high-end services and high technologies, said Zhu.