Tackling excess steel capacity: The Chinese way

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Published: March 15, 2017 3:27:12 AM

The issue of surplus capacity in global steel industry, spearheaded by China, CIS and a few other countries and its impact on the rest of the industry has been discussed earlier.

A look at the efforts made by China in eliminating excess capacity would still be much interesting as it has significant implications on supply dynamics in the global steel industry. (Reuters)

The issue of surplus capacity in global steel industry, spearheaded by China, CIS and a few other countries and its impact on the rest of the industry has been discussed earlier. The continuation of a subdued market condition all across the globe has brought back the issue as a central theme once again. Global production of crude steel was 1,628.5 MT in 2016 with capacity utilisation pegged at 69.3%. The derived global economic capacity can be assessed at 2,349 MT. The available estimates suggest that around 60% of the global surplus capacity is accounted for by China.

A look at the efforts made by China in eliminating excess capacity would still be much interesting as it has significant implications on supply dynamics in the global steel industry. It is worth mentioning that capacity elimination process in China that involves a number of departments is jointly facilitated by NDRC, MIIT, the General Administration of Quality Supervision, Inspection and Quarantine and the China Banking Regulatory Commission. This would also take care of the resettlement of workers who could lose jobs due to restructuring process involving capacity reduction.

A special fund of $15.33 bn has been created to compensate local governments and SOEs for capacity reduction. India can very much learn from this unique experiment of resolving various issues that cut across a number of wings of the government.

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All small BF (<400 cubic metres) BOF/EAF (<30t) producing obsolete grades steel are being closed. A list of 35 steel mills (belonging to Hebei, Shanxi, Jiangsu, Shandong, Sichuan provinces) that would be removed from the list of qualified steel companies have been circulated for public comments.

The elimination of surplus and environment polluting industries in steel, coal and cement in China for the last few years shows that during 2006-15 China had closed down nearly 212.83MT of iron making and 167.65MT of steel melting capacities in the country.

Currently around 720 MT of steel production in China comes from BF/BOF route, 38MT from EAF and the balance 50 MT of production is generated by Induction Furnaces. The actual production tonnage reported by the Induction Furnaces out of their estimated total capacity of 100-120 MT is, however, debatable.

China has been talking about the target of closing down 100-150MT of capacities during 2016-20. In 2016, around 45 MT of iron and steel-making capacities have been eliminated in China. If the current trend of closure continues, the total closure may exceed the planned targets.

Apparently 3 objectives are assumed to be achieved by closure of around 45-50 MT of capacity in the current year. Environment pollution, generation of obsolete grades steel products (predominantly rebars and wire rods for construction) and subsidisation of bank loans are slated to be coming down in the follow up of the capacity closure.

China has already announced that all facilities for production of obsolete grades steel are to be eliminated by June 2017. And Hebei, Shanxi, Jiangsu, Shandong, Sichuan are some of the provinces where it would be effected.

It is also desired that with the rebalancing of the demand supply equation, the domestic price level of steel products in China may increase which would relieve the major players to take a toll on their export offers by adjusting volume of exports and there would be significant improvement in the quality of steel production with the elimination of obsolete grades of steel.

The supply of scrap would rise with corresponding increase in demand for iron ore. Chinese steel consumption in 2016 reached 666 MT and is projected by WSA to come down to 652 MT in 2017. The rise in property market and stimulus investment in infrastructure of $1.6 trillion is expected to rejuvenate the domestic steel market in China.

Faced with an avalanche of AD/CVD measures against its exports, China is competing with India, Turkey, Korea and Japan in SE Asia, Vietnam, Saudi Arabia, US and Europe. There is every likelihood that Chinese exports would be lower in 2017.

Its domestic price level would rise and indigenous demand stable. There is likely to be a deceleration in Chinese coke exports and no sharp fall in demand for imported iron ore. This is good news for prices of merchant iron ore.

The author is DG, Institute of Steel Growth and Development.
Views expressed are personal.

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