Relentless Capacity Additions continues in China's Steel Sector despite Overcapacity

China has been engaged in a multiyear program to shutter outdated, more polluting steel capacity. New additions have been authorized only on a replacement basis but the market research suggests that the plants that have been closed for some years but not pulled down have been allowed to count towards the construction of new, far more efficient steel plants.

In a recently held World Steel Dynamics conference, Wenzhang Wu, president of Steelhome said that about 97 MnT of crude steel capacity is under construction in China which is expected to increase the country's capacity in coastal areas to 226 MnT by 2025.

Wu added that the Chinese government has implemented measures to strictly curb new steel capacity, with a policy that prohibits new capacity from coming on line without equivalent or higher capacity being idled. But the old capacity that corresponds to the new 97 MnT has already been idled.

This year it is being estimated that China's crude steel capacity will reach 1.2 billion MnT. In the September-October period of this year alone, China approved eight steel capacity replacement projects which will see 17.2 MnT per year of pig iron and 13.6 MnT per year of crude steel capacity commissioned in the next 3-4 years. The new projects are predicated on closures of 19.52 MnT per year of pig iron and 15.21 MnT per year of crude steel capacity (5.18 MnT per year of pig iron and 2.16 MnT per year of crude steel capacity were already closed before the end of 2018).

This means there will be just 14.39 MnT per year of pig iron and 13.04 MnT per year of crude steel capacity closed during 2020-23, resulting in a net increase of 2.79 MnT per year of pig iron and 0.51 MnT per year of crude steel capacity over the period.

The problem is further exacerbated by actual output from new facilities being even higher than headline capacity. The new facilities can produce up to 20% more than the stated installed capacity possible through improved production technologies -- by adding more scrap into the iron and steelmaking process -- and by using higher-grade iron ore.

In terms of consumption although apparent consumption of steel is up in China, with projections putting consumption at 924 MnT in 2019 compared with 869 MnT t in 2018, the major cause of concern is that the supply is exceeding demand. Chin's crude steel production is projected to increase from 928 MnT in 2018 to 980 MnT in 2019.

This further creates a risk that any drop in Chinese steel consumption could redirect tonnages onto the export market, exacerbating the current flatness in global steel demand.

World Steel Dynamics projections show that global steel demand growth will slow to 3.9% in 2019, reaching 1.8 MnT, and a further slowdown will be seen in 2020 with growth of just 1.7%. As non-Chinese steel demand flounders, the risk is that any unexpected drop in demand in China could shift further tonnages onto an already saturated export market marked by protectionism, causing steel prices to sink.