China Halts Steel ‘Capacity Replacement’ Program Due to Overcapacity Crisis

China’s Ministry of Industry and Information Technology has halted its “capacity replacement” policy in the steel manufacturing sector due to decreasing profits in the steel industry.

Effective August 23, the replacement program initiated in 2021 has been paused, meaning no new steel production applications will be approved under the program.

In an announcement, the ministry stated that the policy is no longer viable given the “new challenges” faced by the steel industry, with new regulations being developed to replace it.

The capacity replacement program for steel manufacturers required shutting down a certain amount of existing capacity when establishing new steel plants.

Notably, in certain environmentally sensitive areas, for every metric ton of steel production capacity added, 1.5 metric tons of existing production capacity needed to be closed, or 1.25 metric tons in other areas. Some exceptions, like “electric arc furnace” plants, were included. Companies often constructed new facilities during the replacement process.

Various experts have differing views on the implications of the policy suspension.

Sun Kuo-hsiang, a professor of international affairs and business at Nanhua University in Taiwan, mentioned that the pause does not constitute a complete ban on the construction of new steel plants.

“This measure only temporarily suspends the policy requirement for constructing new steel factories. It depends on the new policies established by the ministry whether companies will be permitted to build new steel plants under certain conditions,” he explained.

Chinese American economist Davy J. Wong believes that the suspension implies prohibiting the construction of new steel mills. He stated, “Given the existing production overcapacity, it should mean that no new construction will be allowed to increase production capacity.”

Since 2020, China’s domestic steel demand has dropped by over 10 percent. The significant production overcapacity has caused steel prices to plummet by 38.7 percent in recent months, exacerbating the crisis in China’s steel industry.

Hu Wangming, chairman of China Baowu Steel Group, the world’s largest steel producer, warned at a 2024 semi-annual work conference that the current conditions in the steel industry are more severe than those in 2008 and 2015, indicating a “severe winter” for the entire industry. The company also highlighted the sharp decline in product prices.

Weak Domestic Demand, Dumping in the West

Sun noted that the suspension of capacity replacement is an emergency response by Chinese authorities to address the overcapacity issue. The rise in exports is a consequence of overcapacity and China’s shrinking domestic market. However, trade restrictions by western countries on China’s dumping have worsened the crisis in China’s steel industry.

China’s steel exports surged this year to the highest levels since 2016, seeking external markets to absorb its 1 billion tons of annual production. However, the influx of cheap Chinese steel products into foreign markets has escalated trade disputes with other nations.

China’s prolonged real estate crisis has significantly impacted domestic construction material demand, coupled with local governments with high debt levels reducing infrastructure investments. These factors have contributed to the exacerbation of the overcapacity problem in China’s steel industry.

“The deceleration or stagnation of real estate development in recent years has led to a sharp reduction in demand for steel, cement, and other construction materials,” Sun added.

He emphasized, “In addition to the construction sector, the slowdown in China’s manufacturing industry has decreased demand for the steel industry as well.”

He highlighted that China’s industrial and economic slowdown includes declining export demand and weak domestic demand, citing the challenges faced by China’s industry as a whole.

Wong echoed this sentiment, stating that weak domestic demand in other sectors has further compounded the steel industry’s challenges. “The diminishing demand for cars, home appliances, and other goods has decreased the steel industry’s prospects,” he noted.

Long-Term Structural Problem

The Chinese economy has increasingly relied on exports to absorb its steel overcapacity due to inadequate domestic demand, which is not a sustainable solution for China, as noted by Sun.

“China is grappling with economic downturn challenges, particularly in the industrial sector. Despite various stimulus policies, there is no significant improvement in China’s economic growth. These factors indicate structural issues in China’s current industry and economy, requiring a period of adjustment to balance growth and overcapacity reduction,” he remarked. “Therefore, how to solve the long-term goal of balancing growth and overcapacity reduction is crucial.”

Wong shared a similar assessment, noting that China should have continued focusing on exporting mature products like home appliances, furniture, and clothing. “However, Chinese authorities have shifted focus to developing new export industries like electric vehicles, lithium batteries, and solar panels, which have faced sanctions from major markets in Europe and the United States, contributing to China’s bleak economic situation,” he explained.

Luo Ya contributed to this report.