China’s steel industry is experiencing a significant decline in demand, resulting in plummeting profits and a surge in exports. In response, the Ministry of Industry and Information Technology of the Chinese Communist Party has announced the suspension of the “capacity replacement” system.
For years, the Chinese authorities have implemented the “capacity replacement” system, which requires companies in the steel industry to eliminate a certain amount of existing outdated capacity when building new steel plants. In a statement released by the Ministry of Industry and Information Technology, the requirement will no longer apply starting from Friday, August 23, and authorities will formulate alternative plans.
The prolonged real estate crisis has impacted the demand for construction materials, and heavily indebted local governments have been tightening infrastructure investment, exacerbating the dilemma of overcapacity in the Chinese steel industry.
In recent months, with the oversupply of steel intensifying, steel prices have plunged, deepening the woes of the Chinese steel industry and prompting increasing calls for action from the Chinese authorities.
Earlier this month, China Baowu Steel Group, the world’s largest steel producer, issued a warning about the sharp drop in product prices. Hu Wangming, Chairman of China Baowu Steel Group, stated that the current situation in the steel industry is more severe than in 2008 and 2015, with the entire industry facing a “harsh winter.”
Since 2020, steel demand has decreased by over 10%, and many analysts suggest that the steel industry needs to reduce its scale.
This year, China’s steel exports have surged to their highest level since 2016, indicating that steel mills are striving to find markets for the excess production every year. However, the flood of cheap Chinese steel products has also increased trade disputes between Beijing and other countries.
“The current supply and demand situation in the steel industry is facing new challenges,” stated the Ministry of Industry and Information Technology in a declaration, highlighting issues such as inadequate policy implementation, imperfect supervision mechanisms, and discrepancies with industry development trends and demand.
Around 2015, the Chinese authorities introduced the “capacity replacement” policy for heavy industries, including steel, to address the problem of uncontrolled expansion.
According to regulations implemented three years ago, in environmentally sensitive areas, for every additional ton of steel production capacity, 1.5 tons of existing capacity must be closed, or 1.25 tons of existing capacity must be closed in all other areas. Some important exceptions exist, such as “electric arc furnace” factories that primarily utilize scrap steel.
Senior analyst He Jianhui from Guotou Anxin Futures told Bloomberg, “The capacity replacement plan has actually brought growth because steel mills typically dismantle outdated facilities in exchange for larger plants.”
“Now the entire industry is experiencing a significant decline in demand, and overcapacity is becoming more severe,” He Jianhui stated.
Following the announcement by the Ministry of Industry and Information Technology, some industry insiders in the Chinese cement industry have also called for consideration of stopping the “capacity replacement” system that is ineffective in reducing production overcapacity amid superfluous production and mismatched supply and demand, exacerbating industry turbulence.