China's steel 'capacity swaps' scheme halted pending new guidelines

MySteel Global: China's Ministry of Industry and Information Technology (MIIT) issued a notice on 22 August, requiring all provincial and regional governments across the country to suspend public disclosures and announcements relating to new steel-production 'capacity swap' plans among steelmakers under their jurisdiction until its revision of the scheme's guidelines is completed.

The current capacity swap guidelines, which took effect on 1 June, 2021, requires steel mills seeking to introduce new iron or steelmaking capacity to phase out old facilities of at least the same productive capacity in operation at the time, either capacity that the mill already owns or capacity it has "purchased" from other steelmakers.

The old-for-new swap ratio for blast furnaces (BFs) must be no less than 1.5:1 in areas that are susceptible to atmospheric pollution such as the Beijing-Tianjin-Hebei region, while the ratio for electric-arc-furnaces (EAFs) is set at 1:1, as Mysteel Global reported.

The swap guidelines have effectively promoted upgrading, layout optimisation, and mergers and acquisitions in China's steel industry, MIIT noted in its announcement on Thursday. During this year's January-July period alone, a total of 15 steel mills in eight provinces and autonomous regions nationwide had unveiled plans to install around 8.05 million tonnes (mnt)/year (y) of ironmaking capacity in BFs and 15.42 mnt/y of steelmaking capacity in EAFs and converters, according to Mysteel's tracking. At the same time, the mills have pledged to scrap about 10.84 mnt/y of old ironmaking capacity and 18.41 mnt/y of steelmaking capacity, the data showed.

However, China's steel industry is currently facing new supply and demand challenges, the ministry explained, and new development directions such as 'green' and low-carbon steel are creating new issues for the industry that the guidelines need to address, it said. Therefore, it was decided to suspend actions based on the current regulations from 23 August and that the revision of the guidelines would be speeded up, MIIT said. When the revised guidelines might be published the ministry did not say.

Although MIIT's announcement contained little detail, a Beijing-based market watcher suggested that part of the ministry's motivation to revise the scheme might be to close some loopholes under which some mills might take advantage of the existing policy to expand production capacity illegally. Instances have come to light where mills have not stopped facilities as promised while proceeding with expansions, Mysteel Global noted.

"Some steel mills may also want to withdraw from the industry but are reluctant to let go," he said, referring to such mills as 'zombie mills' that keep their facilities operating and still producing, hoping that one day their capacity will be purchased by other mills needing to 'buy' capacity to swap and scrap.

China's steel industry has continuously faced severe contradictions between strong supply and weak demand, he noted. "The steel industry now needs to clear out a number of zombie mills in a timely manner," he stressed. As of 22 August, the profit ratio among the 247 BF mills nationwide under Mysteel's tracking recorded just 1.3%, marking the lowest level since Mysteel began keeping records in August 2012.

Note: This has been written in accordance with an article exchange agreement between MySteel Global and BigMint.