When less means more in China’s steel capacity

If China’s economy realises a soft landing, the steel industry will have an excess of production capacity of 200 to 300Mt annually, according to Xu Kuangdi, director of the Chinese Society for Metals. The country saw nearly 300Mt of new steel production capacity added from 2008 to 2010 when the world was in the middle of a serious financial crisis.

This is partly because local governments rely on steelmakers to produce more to reach their targets in GDP growth and tax revenues.

Furthermore, only by keeping up production levels can the steelmakers pay credit loans, employees’ wages, and other costs. Tellingly, banks lend to steelmakers based on the firms’ cash revenues.

China’s steel sector has gone through several rounds of cutting excess capacity though the effect has been limited, with some areas of the country even having more capacity now than before.

Eliminating the outdated capacities has been the major means of cutting production capacity in the past, experts say, but adding that this will not work in the future because outdated capacity has almost all been eliminated. Some steelmakers built increased production capacity after abandoning the outdated plant, which partly leads to the counterintuitive phenomenon of ‘more elimination, more capacity.

Improving environmental protection standards and increasing the threshold to entering the industry, changing tax levying or credit conditions, and giving subsidies to those cutting capacity would be more effective according to some industry analysts.

China’s steel consumption accounted for 43% of the world’s total in 2012. It will see its demand for crude steel peak at around 2015, and then keep stable for about 10 years, with an annual iron ore demand of 900 to 1000Mt on average, according to Zhong Ziran, chief engineer of the Ministry of Land and Resources.

Source: China Metals e-mail infochn@public.bta.net.cn