China speeds steel cuts as pressures rise – analysis

eurasiareview.com Policy,  Environmental Protection 2018-02-27 11:11:00

China has announced plans to meet targets for downsizing its steel industry two years ahead of schedule in an apparent signal that there will be no more cuts in production capacity after 2018.

 

On February 7, the Ministry of Industry and Information Technology (MIIT) said in a statement that China will reach targets for trimming surplus steel capacity this year instead of in 2020, Reuters reported.

 

In January 2016, Premier Li Keqiang first pledged to reduce overcapacity in the bloated steel sector by 100 million to 150 million tonnes without specifying a date.

 

In official statements and state media since then, the government's goal has been reported as 150 million tonnes by 2020.

 

According to MIIT statements, China has already closed at least 115 million tonnes of outmoded and excess capacity.

 

In 2016, the industry reportedly exceeded its goal of 45 million tonnes for the year, shutting down 65 million tonnes of capacity. Last year, it reached the annual target of 50 million tonnes by the end of August, the ministry said.

 

The size and pace of the cuts has been closely watched because China produces nearly half the world's crude steel with the capacity to make far more.

 

China's overcapacity has been a source of international tension for well over a decade, sparking complaints from foreign steelmakers over low prices, hidden subsidies and unfair export competition.

 

Last April, U.S. President Donald Trump ordered an investigation into whether steel imports from China and other countries pose a national security risk.

 

Trump is scheduled to decide on possible trade measures for steel imports by April 11, 90 days after a Commerce Department report was submitted under the rarely-used Section 232 of the Trade Expansion Act of 1962. A similar decision is pending for aluminum on April 19.

 

Commerce Secretary Wilbur Ross has recommended a choice from among three options on steel. These include a 24% tariff on imports from all countries, a 53% tariff on steel from China and 11 other countries, combined with quota restrictions on other exporters, or quotas on imports from all countries.

 

On February 17, China's Ministry of Commerce (MOC) called the U.S. finding of a national security threat "groundless" and warned of retaliation.

 

"If the United States' final decision affects China's interests, we will take necessary measures to defend our rights," said Wang Hejun, head of the MOC trade remedy and investigation bureau, as quoted by the official Xinhua news agency.

 

But China also has reasons of its own for tightening up on steel, which has been a major source of coal consumption and smog.

 

Last March, central government and municipal authorities unveiled plans to restrict steel production in northern areas surrounding Beijing during the winter heating season starting November 15, reducing output by half at most mills.

 

The limits appear to have helped Beijing to avoid a repeat of last winter's smog crisis, but the controls will be lifted on March 15, opening the door to a surge in production again.

 

On February 26, Reuters reported that Tangshan city in Hebei province is considering a draft plan to extend the restrictions for some capacity until November to help reduce smog.

 

It is unclear whether the extension will take place or whether other steelmakers would boost production in response.

 

But even with the winter cutbacks, China's crude steel production rose 5.7% last year to a record 831.7 million tonnes, according to the National Bureau of Statistics (NBS).

 

China's capacity cutting has only a tangential effect on production, primarily because its overcapacity has been so huge.

 

For years, state media reports have highlighted China's capacity cuts without quantifying the total size of the industry's production capacity.

 

But in April 2016, a senior MIIT official said China's capacity stood at 1.13 billion tonnes, Reuters reported at the time. The total leaves 326 million tonnes as surplus, based on NBS production figures for 2015.

 

As a result, China's targeted cuts of 150 million tonnes would eliminate only 46% of its excess, allowing steelmakers to set records for output despite the capacity reductions.

 

The extent of the downsizing makes it critical to know whether China's announcement on achieving the target means it has no plans to do more.

 

So far, China is celebrating the results of its policies, since the cuts have had a psychological effect on the market, returning the industry to profitability.

 

"Steel prices soared on expectations that supply would tighten due to capacity cuts," the official English-language China Daily reported, citing a jump of more than 50% for benchmark rebar last year.

 

But the policies have done little to address foreign complaints about China's production volumes and market dominance.

 

Last year, China's global market share for crude steel rose to 49.2% from 49% in 2016, the World Steel Association said.

 

Since 2016, the capacity cuts have actually encouraged more production as some steelmakers reopened closed lines to take advantage of higher prices.

 

In recent weeks, MIIT has issued tough statements on keeping capacity in check without ruling out possible production increases.

On January 8, the ministry said it would require steelmakers to eliminate 1.25 tonnes of old capacity for every new ton of modern capacity they add this year.

 

"We will strictly forbid any new steel capacity to be launched and make sure all outdated steel capacity is eliminated and prevented from reopening," the ministry pledged in an earlier statement.

 

But the country's biggest producer, state-owned China Baowu Steel Group, has already announced plans to expand in the longer term as smaller private competitors are pressured to shut down, the South China Morning Post reported in September.

 

Baowu Steel has targeted an increase in capacity from 60 million tonnes to 100 million tonnes, the company's general manager said.

 

Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said the impact of China’s cuts depends on what it plans to do next.

 

"The Chinese steel sector was 35% to 40% oversized," Scissors said. "Now it may be only half that. The bloat was so bad that capacity cuts have had no visible effect on production, but they still needed to be made.”

 

"If Beijing now declares victory and the industry goes back to business as usual, the whole program was a farce," he said.

 

"If they make no further capacity cuts but prevent re-expansion, the true target was only consolidation of larger state-owned enterprises, as the central government has long wanted," said Scissors.

 

"But there's at least more of a chance to actually shrink steel now than there was in 2014," he concluded.

 

While much may depend on the psychological effects of the numbers, there are several reasons to doubt the numbers themselves.

 

Last year, a study sponsored by Greenpeace East Asia found that 54 million tonnes of operations that were claimed as capacity cuts in 2016 had restarted due to price increases.

 

It is unclear whether the government has continued to count such temporary closures in its totals of shutdowns.

 

Another analysis by the Peterson Institute for International Economics argued that 200 million tonnes of spare capacity was reasonable for China's steel industry to respond to market fluctuations. But it also said that officials had mixed iron and steel together in their reports, making it unclear whether the goals for crude steel have been met.

 

China has also claimed gains in ending 140 million tonnes of illicit production of substandard steel made with induction furnaces using scrap metal. The products are not included in the steel capacity cut totals, although they affect prices and smog-producing emissions.

 

Whether the production has been permanently eliminated may be open to question.

 

"Induction furnaces have been a thorn in the eye of Chinese steel industrial policy since 2002, but have largely been successful in evading measures," the report said.

 

"The more underground, home-brew operations play a cat-and-mouse game with the authorities. They simply dismantle facilities quickly before inspections, and assemble them again after," it said, quoting "market participants."

 

(Writing by William Gao  Editing by Jessie Jia)
For any questions, please contact us by inqury@fwenergy.com or +86-351-7219322.

Share this article
Connect with us

Editors Recommendations

1 China Coal Daily Track (Jun 21) 2018-06-21

Thermal coal Domestic market Coal mines in Yulin, Shaanxi province expected another increase in the short run as purchase was active recently from buyers in Hebei, Shandong and Shanxi. Imp

2 China's top 3 provinces contribute 68% of raw coal output in Jan-May 2018-06-21

Northern China's Inner Mongolia, Shanxi and Shaanxi produced 67.94% of the country's total raw coal in the first five months, showed data from the National Bureau of Statistics (NBS). NBS

3 CMPort concludes trade of 50% stake in Newcastle port 2018-06-21

China Merchants Port Holdings(CMPort) has taken over 50% stake in the Newcastle port at AU$607.5 million ($457.5 million) from its parent China Merchants Group on June 14, the company announced on its

4 Chinese central SOEs' profit growth accelerates in Jan-May 2018-06-21

Profit growth of China's central state-owned enterprises (SOEs) picked up pace over January-May period this year, thanks to the deepened enterprise reform and resolve in initiative and sustainable dev

5 Hubei power plants receive 3.6 Mt coal in May, up 12% MoM 2018-06-21

Central China's Hubei province saw its unified dispatch power plants receive a total of 3.62 million tonnes of coal in May from local mines and other provinces, showed data from its provincial economi

6 Sentiment fluctuation pares thermal coal trades at China's N ports 2018-06-21

China's domestic thermal coal market saw bearish and bullish sentiments both growing in recent days, rendering traders unable to judge the market trend but stay on the sidelines. Spot pri

7 S. Korea May met. coal imports down 14.2% YoY 2018-06-21

South Korea imported 2.35 million tonnes of metallurgical coal (including coking coal and PCI coal) in May, dropping 14.18% year on year and down 13.9% from the preceding month, according to the lates

8 S. Korea May thermal coal imports decrease 20% MoM 2018-06-21

South Korea's thermal coal imports (including bituminous and sub-bituminous coal) reached 8.24 million tonnes in May, down 20.61% from a month ago yet up 4.89% year on year, the latest South Korea

9 China's rail cargo shipment hits new high in May 2018-06-21

China shipped a total 338.84 million tonnes of cargoes via railways in May, rising 11.8% from the year prior, hitting a new high since this year, said China Railway Corporation on June 20.

10 Chinese govt relaxes coal import curbs to prepare for summer high demand 2018-06-21

The Chinese government has reduced restrictions on coal imports at some southern and eastern ports on concerns about higher prices and regional power shortages, as demand for electricity jumps during

Most Read Articles

1 China's major coal miners vow to ensure supply and stabilize prices 2018-06-12

While CHN Energy announced late last week to lower their June contract coal price within the "yellow range" below 600 yuan/t, more major miners have promised to lower prices to ensure adequate supply

2 Major Chinese miners work to stabilize thermal coal prices 2018-06-11

Some leading miners in China made price adjustments in response to government's call for stabilizing thermal coal price and supply, sources said. China Energy Investment Cor

3 China to launch broader environmental inspections this month 2018-06-11

China will expand environmental inspections to more cities and regions in a new round of checks from this month to April next year, the Ministry of Ecology and Environment (MEE) said in a statement on

4 China's raw coal output rises to a new high in May 2018-06-14

China's raw coal production registered a new high in May since this year, according to official data, as miners churned out the material driven mainly by tempting profit and rallying prices.

5 China's steel mills utilisation rate falls for 3rd week on environmental checks 2018-06-12

Utilisation rate at steel blast furnaces across China fell for a third consecutive week last week as of June 8, data showed, as environmental inspections continued to weigh on operation at steel mills

6 China proceeds development of coal-to-oil conversion 2018-06-15

China is developing new energy sources by converting coal into diesel. The world's first coal to diesel conversion production line, in China's Inner Mongolia autonomous region, produced 8

7 Weekly China coal market news summary (Jun 11 – Jun 15) 2018-06-15

China to launch broader environmental inspections this month China will expand environmental inspections to more cities and regions in a new round of checks from this month to April next yea

8 CHN Energy reduces contract coal prices within 600 yuan/t, sources 2018-06-11

China Energy Investment Group, also known as CHN Energy, announced to control its monthly contract prices of thermal coal, media reported late June 8, in a way to cool down the overheated coal market.

9 China plans to create a $78 bln natural gas giant 2018-06-15

Together with its massive push to have more and more residential and industrial customers switch from coal to gas, China is aiming to overhaul the ownership of its huge gas pipeline network.

10 China's 20 large steel makers launch maintenance to improve environment 2018-06-14

A total 20 Chinese large steel makers have launched maintenances since June 11, said the Ministry of Ecology and Environment days earlier, in a move to strengthen environmental inspections at key poll