It is estimated that nearly 80 million tons of new steel capacity will be put into production this year. Li Xinchuang, Party Secretary and Chief Engineer of the Metallurgical Industry Planning and Research Institute, made the above statement at the 2020 (11th) China Steel Development Forum on July 24. Li stated at the forum that the concentrated release of steel capacity in a short period of time may have a significant impact on the market. "Especially under the circumstances where the domestic and international market demand has fallen due to the epidemic, the steel industry may once again face a situation of oversupply."
According to the latest data released by the National Development and Reform Commission, China's cumulative crude steel production in the first six months of this year reached 499 million tons, a year-on-year increase of 1.4%. Li stated that the average daily crude steel production was 2.7418 million tons, which translates to an annual crude steel output exceeding 1 billion tons. "China's steel output this year will account for more than 56% of the global total." Li said, especially in June, daily crude steel production exceeded 3 million tons for the first time, setting a historical high. Li believes that the pressure on the Chinese steel industry to prevent overcapacity will exist for a long time.
In February 2016, the State Council issued "Opinions on Resolving Overcapacity in the Steel Industry and Achieving its Development", proposing a goal of resolving over 150 million tons of overcapacity within five years.
The Chinese steel industry completed the above-mentioned target tasks in 2018, two years ahead of schedule. After that, the Chinese government implemented a capacity replacement method for new steel projects to continue promoting supply-side reforms and adjusting the industrial structure of the steel industry.
In April 2015, the Ministry of Industry and Information Technology (MIIT) issued the "Implementation Measures for Steel Industry Capacity Replacement" (hereinafter referred to as the "Replacement Measures"), which were revised in 2017 to clarify the categories of projects subject to capacity replacement.
The 80 million tons of new capacity expected to be put into production this year comes from the previous replacement of old capacity.
Lv Guixin, a first-level inspector of the MIIT's Raw Materials Department, stated that according to statistics from the China Iron and Steel Association, by the end of 2019, the nationwide newly built steelmaking capacity was 276 million tons, and ironmaking capacity was 246 million tons. A cumulative reduction of 34.98 million tons of ironmaking capacity and 28.79 million tons of steelmaking capacity was achieved. According to Lv, the current average replacement ratio for ironmaking and steelmaking across the country is 1.14:1 and 1.1:1 respectively. That is, for every ton of new ironmaking capacity, 1.14 tons of old capacity must be eliminated; for every ton of new steelmaking capacity, 1.1 tons of old capacity must be eliminated. Lv introduced that the MIIT is currently issuing new capacity replacement measures. According to the forum, the MIIT issued the latest draft of the "Replacement Measures" for comments on July 24, with the deadline for comments from the industry and enterprises set for July 29. According to the latest draft of the "Replacement Measures", the replacement ratio in key areas for air pollution control should be no less than 1.5:1, and the replacement ratio in other areas should be no less than 1.25:1; for enterprises that have completed mergers and acquisitions, the compliant capacity replacement ratio in key areas for air pollution control should be no less than 1.25:1, and the replacement ratio in other areas should be no less than 1.1:1. Key areas for air pollution control refer to the Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Pearl River Delta, the Fen-Wei Plain, and other "2+26" atmospheric channel cities, including a total of 46 provinces, cities, and demonstration zones. "Overall, capacity replacement is a good approach." Lv said, adding that this approach promotes the steady exit of backward capacity. The replacement method adopts a list-based management approach, effectively preventing zombie enterprises and eliminated capacity from being revived, providing a reference for the steady exit of excess capacity and the orderly advancement of new capacity. Capacity replacement is also conducive to promoting the development of short-process steelmaking technologies. The "Replacement Measures" stipulate preferential treatment for equal-amount replacement for short-process electric arc furnace steelmaking to guide the transformation and orderly development from long-process to short-process technologies. Long-process technology refers to blast furnace steelmaking, and more than 90% of China's steel capacity uses blast furnace steelmaking technology. The raw materials used in blast furnace and electric furnace steelmaking are different. Blast furnaces require high-grade iron ore and coke as raw materials; electric furnaces can choose scrap steel as raw materials for steelmaking. Lv stated that based on the already announced capacity replacement projects, the newly built electric furnace steel capacity is 71.1 million tons, accounting for about 25.8% of the newly built steelmaking capacity, which is far higher than the current share of electric furnace steel capacity in China, which is around 10%. Lv also stated that capacity replacement effectively consolidated the achievements in resolving overcapacity, promoted the cross-regional flow of capacity, improved equipment and technology levels, eliminated a batch of small steel furnaces and converters, and promoted mergers and acquisitions in the steel industry. However, there are also some problems in the capacity replacement process.
Xia Nong, a first-level inspector of the National Development and Reform Commission's Department of Industrial Development, stated at the forum that under the high-pressure situation of zero tolerance for new capacity, some enterprises still fail to shut down the replaced capacity in a timely manner, seek to start construction on various grounds, and engage in other illegal and irregular activities.
Lv also stated that in the actual process of capacity replacement, there are instances of inadequate implementation, including the non-cooperation of enterprises whose equipment has been seized by the court, lax local review and control, and the failure to strictly enforce capacity replacement according to the working years. This has led to irregularities such as replacing shutdown with closure and construction before announcement, increasing the hidden dangers of new capacity. In recent years, many places have also experienced court-ordered auctions of steel capacity. Lv stated that based on the auction cases that have been implemented, some cases have not properly coordinated debt disposal and employee placement, resulting in difficulties in implementing the replacement of auctioned excess capacity, and even auctioning off capacity that has been included in the national capacity reduction task. He believes that if the auctioned capacity is not demolished in a timely manner, it will bring the risk of repeated replacement of new capacity. Lv also pointed out that with the continuous progress of production technology and the continuous improvement of enterprise production efficiency, the steel industry has seen a contradiction between capacity reduction and output growth. "Under the general trend of industry reduction, there is a realistic need to further increase the capacity replacement ratio." Lv said. Lv stated that during the current important window period for industry mergers and acquisitions, capacity replacement policies can play a greater role in improving industry concentration.
By the end of 2019, the crude steel output of the top ten steel companies in China accounted for about 36.8% of the total output, only 2.6 percentage points higher than at the end of the Twelfth Five-Year Plan.
On January 24 this year, the National Development and Reform Commission and the Ministry of Industry and Information Technology issued a document suspending the recordation of new domestic steel projects. The two ministries and commissions require all regions to comprehensively review steel capacity projects recorded since 2016, conduct self-examination and correction, and ensure that the projects meet the relevant requirements for safety, environmental protection, energy consumption, quality, land use, industrial policies, and capacity replacement. For projects that have already been put into production, it is necessary to ensure that all replaced capacity is completely demolished.
