Overproduction and Rising Illegal Capacity continues to haunt Chinese Steel Sector

Despite the Chinese government mandate to reduce capacity it seems that Chinese steel producers are stepping up production at an unprecedented rate raising the chances of supply glut once again in China. The country has churned out 577 million tons of crude steel in the first seven months of the year and the record pace puts an annual tally of 1 billion tons within reach.

A cooling of steel prices until around 2015 had been cause for concern in the global steel industry. The Chinese government began cutting off the excess capacity around 2016, lopping off roughly 150 million tonnes by 2018. Authorities also cracked down on plants that produced low-quality ditiaogang steel made from scrap metal. Ditiaogang is illegal, so it did not show up in official statistics, distorting market prices.

The steel prices recovered around 2017 and the production of crude steel, which had been limited to 800 million tons until 2016, also rose. However, demand in China is on the wane. New-automobile unit sales missed year-earlier figures for 14 consecutive months through August. The drawn-out trade war with the U.S. has sapped China's consumer appetite. Sales of appliances have underperformed. The government continues to spend on infrastructure as part of the stimulus program, but the expenditures have not advanced as planned due to the debt-soaked local governments.

Another cause of concern is that in recent years, Chinese steelmakers shuttered outdated blast furnaces in a quest to cut excess capacity and to help the environment. They also built new blast furnaces with reduced capacities. Now nearly 70% of the new furnaces will be operational between this year and next. The added operational capacity will be equivalent to about 61 MnT in 2019 and 62 MnT in 2020.

Industry experts believe that production capacity has decreased, but unlike the old blast furnaces, the new furnaces can run at full capacity, so there is a good possibility that the actual output will rise. China's Ministry of Industry and Information Technology says it will strengthen oversight to prevent excess production. But the recent jump in country's steel output continues apace, and it is unclear how effective the clampdown will be. As a result, the global steel industry is on guard for another cooling of steel prices stemming from China.

The rising illegal capacities

China has shut 700 small steel mills with 140 million tonnes of steel capacity deemed sub-standard, plus 150 million tonnes of inefficient capacity at larger firms, in a four-year campaign against pollution and excess capacity in heavy industries. But despite the efforts to control capacity, China's steel production continues to climb.

The Ministry of Industry and Information Technology (MIIT) is conducting audits to curb outdated capacity and resolve the overcapacity problem. However, the illegal new mills including those not approved by the government, outdated mills that had reopened after being shut, and mills that were supposed to be shut in capacity swaps, in which companies move plants to other regions to reduce the concentration of production in polluted industrial areas are on the rise.

Subsequently, China is planning to speed up mergers and restructuring for steel industries, Xing said, in a national effort to consolidate its steel sector. Beijing has said it plans to put 60% of China's total steel capacity in the hands of its top 10 producers, up from about 40% now.