China's steel industry is undergoing a dramatic shift as the government has abruptly suspended its system for approving new steel plants. This decision comes in response to a deep demand slump that has significantly impacted industry profits and led to a surge in exports. Major players in the sector, such as China Baowu Steel, the world’s largest steel producer, are feeling the effects of this shift. The Ministry of Industry and Information Technology announced that the previous rules, which required the elimination of existing capacity as a condition for building new plants, will no longer apply starting Friday. Instead, the government plans to develop an alternative program to address the current crisis.
In recent months, there have been increasing calls for action from Chinese authorities as steel prices have plummeted amid a growing glut in the market. Demand for steel has fallen by more than 10% since 2020, leading many analysts to suggest that the industry must shrink to align with an economy that is becoming less dependent on steel-intensive construction. The suspension of new approvals reflects the urgent need for a strategic response to these challenges, as the industry grapples with oversupply and diminishing domestic demand.
The situation has led to a significant increase in Chinese steel exports, which have reached their highest levels since 2016. This surge indicates that mills are struggling to find domestic markets for approximately 1 billion metric tons of annual output. Analysts at Citigroup, including Jack Shang, have expressed concerns that the government's latest move may not adequately address the issue of excess capacity. They argue that the weakening demand necessitates more drastic measures, such as aggressive production control and stronger government enforcement to stabilize the market.
The head of China Baowu Steel Group has warned that the current industry conditions are worse than the crises experienced in 2008 and 2015. Global competitors, including ArcelorMittal SA, have also raised alarms about the negative impact of rising Chinese exports on the international market. Despite these concerns, market reactions to the government's announcement were relatively muted, with steel futures in Shanghai experiencing only a slight increase. A key factor in this response is the fact that many new plants have already received approval and could still enter the market over the next two years, with Citigroup estimating that over 80 million metric tons of approved capacity is not yet operational.
The Ministry of Industry and Information Technology acknowledged that the supply and demand dynamics in the steel industry are facing new challenges. It highlighted issues such as inadequate policy implementation and imperfect supervision mechanisms that do not align with the industry's current needs. The ministry's statement underscores the complexities of managing a sector that has long been characterized by rapid expansion and fluctuating demand.
Historically, Beijing introduced "capacity swaps" for heavy industries, including steel, to control unrestrained growth. Under these rules, which were implemented three years ago, any new steel capacity added in environmentally sensitive areas had to be matched by the closure of 1.5 metric tons of existing capacity, while 1.25 metric tons was required in other regions. However, exceptions were made to encourage the development of electric arc furnace plants, which utilize scrap instead of traditional coal-fired blast furnaces.
Analysts like He Jianhui from SDIC Essence Futures Co. have noted that the capacity swap program has paradoxically led to growth, as mills often opted to demolish older plants to build larger ones. With overall demand for steel clearly declining, the issue of overcapacity is becoming increasingly severe. The ministry's recent announcement signals a shift towards more stringent control measures, indicating a recognition of the urgent need for a revised approach to managing the industry.
In light of these developments, the ministry has stated that it will accelerate research into a new capacity-swap policy. Local authorities that announce any new replacement plans without proper oversight will be deemed to have added capacity illegally. This move reflects the government's commitment to addressing the challenges facing the steel sector while navigating the complexities of a changing economic landscape.
