China | China ahead of schedule in phasing out excess steel capacity
An employee monitors molten iron being poured into a container at a steel plant in Hefei, Anhui province. Photo: Reuters
An employee monitors molten iron being poured into a container at a steel plant in Hefei, Anhui province. Photo: Reuters

China ahead of schedule in phasing out excess steel capacity

Reduced capacity offers support for prices and in turn the major steelmakers as the government pushes for leaner production model

October 25, 2016 4:56 PM (UTC+8)

China is ahead of schedule in phasing out excess steel capacity for the year as part of a government-mandated five-year drive to cut the fat out of the industry, the National Development and Reform Commission said in a news briefing in Beijing on Tuesday.

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The program’s success, which also targets other heavy industries such as coal and cement, translates into good news for China’s bigger, more modern producers of the metal in what has been a highly fragmented industry. The cuts could boost utilization rates across steel mills, which have hovered around 70% in the past two years.

Mergers are also driving the consolidation, with Baosteel Group joining with Wuhan Steel Group to create the world’s largest steelmaker after ArcelorMittal. Beijing also aims to push through a merger of Anshan Steel and Benxi Steel by the end of 2016, an industry group official said last month, according to a Reuters report.

Still, according to a Caixin report on October 22, some of the capacity announced as being taken offline included production that had long been dormant. The report cited an unnamed industry source saying some of the steel factories had been closed for as long as three years.

While capacity is being cut, actual crude steel production is little change, reaching 603 million ton this year, up 0.4% through September, data from National Bureau of Statistics shows.

China aims to slash as much as 150 million metric tons of production in five years, or roughly 13% of the country’s total reported steel capacity as of the end of 2015. The strategy is to expand the role of the top-tier companies, consolidate others across regions, and gradually allow non-steel SOEs to divest their businesses in the metal.

Steelmakers in China have seen prices improve in 2016 as commodities markets recovered and infrastructure-led demand accelerated. As of Oct 21, the China Steel Price Index stood at 79 points, up 19.17 points on year and 22.63 points higher from the start of 2016.

The mills have accelerated shutdowns as the year-end approaches, losing 40 million tons of steel capacity so far this year compared with the target of 45 million tons for the whole year. That’s a change in developments from August when the government was speaking of ‘resistance’ within the industry to the capacity cuts.

The Ministry of Industry and Information Technology said on Oct. 25 that capacity removal had reached 90% of the annual target by the end of September.

Central government-controlled steel makers are set to meet their share of capacity cuts of 7.19 million tons by the end of October, the head of restructuring at the State-Owned Assets Supervision and Administration Commission told reporters over the weekend.

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