Steel demand has fallen more than 10 percent since 2020 in China. Earlier, companies were permitted to build steel plants on the condition that they remove set amounts of existing and older capacity.
Sep 3, 2024
In a strong response to a demand slump, which has fallen more than 10 percent since 2020, crushing industry profits and fueling a surge of exports, the People’s Republic of China has suspended approvals for new steel plants.
For years, China has operated a system in which companies can build steel plants on the condition that they remove set amounts of existing and older capacity.
These rules have ceased to apply from August 23, said a statement issued by the Chinese Ministry of Industry and Information Technology.
The Ministry said the government would develop an alternative program. The supply and demand relationship in the steel industry was facing new challenges. There were problems such as inadequate policy implementation, imperfect supervision and implementation mechanisms, and incompatibility with the industry’s development situation and needs, it added.
The statement said the Ministry would accelerate research into a new capacity-swap policy. Local authorities that announced any new replacement plans would be deemed to have added capacity illegally, it added.
The past few months have witnessed strong calls from the Chinese authorities for action amid the decreasing demand of steel and its prices.
As per analysts, the industry needed to shrink to fit an economy which was becoming less reliant on steel-intensive construction.
As the mills struggled to find domestic markets for about 1 billion tons a year of output, Chinese steel exports registered a record growth in 2024, highest after 2016.
An analyst said that this would not do enough to meaningfully phase out excess capacity, adding that the weakening demand on the ground called for more drastic measures, such as aggressive production control, along with strong government enforcement.
China Baowu Steel Group Corp, the world’s biggest producer of steel, told the media last week that the industry faced a situation worse than the 2008 and 2015 crises.
The country had introduced the ‘capacity swaps’ for heavy industries, including steel, in the middle of last decade, as the government began to tackle untrammeled expansion.
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Under the latest rules introduced three years ago, each ton of annual steel capacity added in environmentally sensitive areas had to be matched by the closure of 1.5 tons of existing capacity, or by 1.25 tons in all other areas.
However, there were significant exceptions, largely designed to encourage electric arc furnace plants that relied on scrap, rather than the coal-fired blast furnaces that dominated China’s industry.
As per an analyst, the capacity swap program actually led to growth, as mills often opted to demolish outdated plants for bigger ones. Since the whole industry’s demand was currently declining, overcapacity was becoming more and more serious. This document from the ministry sent a signal of control, he added.
