The Chinese government recently announced the suspension of the “capacity replacement” system, which means putting a halt to the construction of new steel plants. Experts believe that this decision is closely related to the severe overcapacity in China’s steel industry. The main reason behind this overcapacity is the real estate crisis, the slowdown in manufacturing growth, coupled with export restrictions by various countries, leading to a dire situation in the steel industry that will pose challenges for the overall industrial sector.
According to David Huang, a Chinese-American economist, “This is certainly related to the overcapacity in China’s steel industry because in the past, the planned economy treated steel capacity as a symbol of industrialization, so there was a desperate push to increase capacity, and state-owned enterprises often used capacity as a form of political capital.”
Huang explained, “First of all, we need to understand the situation of China’s steel industry, which has been plagued by overcapacity for a long time. Statistics show that since around 2016-17 when data was published, China’s steel production has accounted for around 56% to 60% of the global total.”
“Moreover, China’s steel production alone is equivalent to the sum of the seven major industrial countries behind it. So, China’s steel production has always been plagued by severe overcapacity.”
Huang believes that this is due to two main reasons. Firstly, these are state-owned enterprises, which often use production capacity as political capital and a measure of political achievement. Therefore, they strive to expand capacity.
“Secondly, since the era of Mao Zedong, the Chinese leadership has consistently used steel production as an indicator of the country’s industrialization. Thus, within the bureaucratic system and the construction of state-owned enterprises in the past, steel has always been considered as an essential capacity.”
“And once these factories are established as state-owned enterprises, it is very difficult to downsize and reform them.”
Sun Guoxiang, the director of the Asia-Pacific Research Institute at Nanhua University, also expressed that “China’s steel industry has long suffered from overcapacity issues, especially against the backdrop of the sluggish real estate market and reduced infrastructure investment by local governments, further reducing steel demand and resulting in excessive steel production capacity.”
In recent years, the Chinese real estate market has been facing a severe crisis. Sun Guoxiang stated, “Project development has slowed down or even stalled, leading to a substantial decrease in demand for building materials such as steel and cement.”
Beyond the construction sector, Sun Guoxiang added, “The growth in manufacturing has also slowed down, which has consequently reduced the demand for steel in the manufacturing industry.”
On Saturday, August 31, China’s National Bureau of Statistics released the Purchasing Managers’ Index (PMI) for the manufacturing sector in August, which stood at 49.1, a decrease of 0.3 percentage points from the previous month. This marks the fourth consecutive month that the PMI has remained below the threshold of 50, signifying a contraction in the manufacturing sector.
“The price of steel has also plummeted as a result, and the profitability of the steel industry is now severely affected. The suspension of the capacity replacement system is an emergency measure taken by the Chinese government to address the issue of overcapacity,” he said, indicating the challenges faced by the overall industrial sector in China.
Huang also revealed that the issue of counterfeiting within China is severe, with a large amount of steel materials being falsified. Steel products that do not meet standards are often sold under false labels, leading to market chaos. For instance, in Jieyang, Guangdong, it is claimed that over 50% of the stainless steel produced nationally is actually fake stainless steel.
“In reality, it’s fake stainless steel made from iron, polished to deceive buyers. This prevalent circulation of counterfeit goods, coupled with unstable quality, reduced domestic demand, export restrictions, and various other factors, undoubtedly exacerbates the already severe overcapacity issue in the steel industry.”
According to Bloomberg, demand for steel has decreased by over 10% since 2020. China’s steel exports this year have surged to the highest level since 2016, indicating that steel mills are struggling to find buyers domestically for an annual production of around 1 billion tons.
Due to insufficient domestic demand, many steel companies have had to rely on exports to absorb excess production capacity. Sun Guoxiang pointed out, “However, it is evident that relying on exports is not a long-term solution for China.”
In May of this year, the European Commission initiated an anti-dumping investigation on steel products following a complaint from the European Steel Industry Association (Eurofer). This investigation is expected to last for 14 months, with the possibility of the EU imposing interim tariffs in 7 to 8 months.
In April, the White House announced that President Biden had instructed the Office of the U.S. Trade Representative to consider tripling the existing tariff rates on Chinese steel and aluminum. Currently, the average tariff on steel and aluminum is 7.5%. Since President Biden took office, the Department of Commerce has imposed over 30 anti-dumping and countervailing duties on steel-related products.
Furthermore, the government’s senior team is cooperating with Mexico to prevent China from evading tariffs on steel and aluminum by passing through Mexico.
In addition to the United States, Latin American countries have also urged for an increase in import tariffs on steel. Mexico, Chile, and Brazil have announced measures to impose high tariffs on steel imports from countries that have not signed a Free Trade Agreement (FTA). Mexico has imposed a 50% tariff on steel imports from China; Chile has levied a 35.4% tariff on steel balls and a 24.99% tariff on steel rods from China; while Brazil has raised its tariffs on Chinese steel from 10% to 25%.
Vietnam, the largest steel buyer in Southeast Asia, recently decided to join countries including the United States in initiating an anti-dumping investigation against Chinese steel. In mid-June, the Vietnamese Ministry of Trade announced the commencement of an anti-dumping investigation on imported galvanized steel originating from China following requests from five domestic steel companies.
With external pressures mounting and domestic challenges persisting, the steel industry in China is facing an all-encompassing crisis. Hu Wangming, Chairman of Baowu Group, mentioned during the mid-year work conference in 2024 that compared to the same period last year, the steel industry faced even more difficult operational conditions in the first half of this year. The current steel “winter” is likely to be longer, colder, and more challenging than anticipated.
Regarding the future impact on the economy, David Huang stated, “Steel production mainly serves the construction industry, real estate construction, automobiles, and other consumer goods and appliances.”
“However, the current domestic situation in China, concerning real estate and infrastructure, looks bleak. In addition, China’s epidemic control policies, coupled with recent economic policies, indicate increasing downward pressure on the economy.”
“Steel is closely related to durable goods and bulk consumer goods, so when the consumption of these goods declines, it is mainly reflected in durable and bulk commodities, having a significant impact on domestic demand, which is likely most affected by steel demand.”
Huang believed that this trend would likely affect the overall industrial situation as well because while traditionally China was adept at exporting mature goods such as the old three: appliances, furniture, and clothing, Beijing has shifted its focus to develop what is known as the new three: new energy vehicles like electric cars, batteries, and solar panels.
“However, these industries are now facing sanctions from major markets in Europe and the United States. Therefore, the current economic situation is very pessimistic.”
Sun Guoxiang also acknowledged that despite various stimulus policies implemented by the government, they have been unable to boost economic growth in China. These factors collectively indicate that China’s current industrial and economic conditions are in a period of adjustment, facing structural problems.