How Much Production Cut and Capacity Replacement is happening in China’s Steel Sector by 2020?
Mining News Pro - In its bid to deal with the problem of overcapacity and rising pollution, China has been following stringent steel capacity cuts since 2016. In this article, we will analyse China’s steel capacity cuts and its replacement strategy for the coming years.

The steel production cuts in the past and upcoming target

China has set a long-term target of 150 MnT of steel capacity curb for the time span of five years starting from 2016 to 2020. Till 2020, the country has also targeted to bring down its crude steel output within 1 billion tonnes, capacity utlisiation rate around 80% and industry concentration of top 10 steel enterprises to 60%.

Now, if we look at the production cuts that have happened in China over past two years i.e. in 2016 and 2017, the country has eliminated about 115 MnT of steelmaking capacity (65 MnT in 2016 and 50 MnT in 2017). By 2017, China’s crude steel capacity has fallen to around 1.0 billion tons and capacity utilization rate was achieved at 85.2%.

In current year of 2018, China has set the steel capacity cut target at 30 MnT. Cutting 30 MnT of steel capacity in CY18 will thus bring the total reduction over three years to 145 MnT which will put China well ahead of its plan to reduce excess capacity by 150 MnT till 2020.

Closure and replacement of steel capacities in China

The capacity cuts in China are targeted through the closure of more polluting induction and blast furnaces. Blast furnaces use iron ore and coal to produce steel whereas Induction furnaces usually manufacture low quality steel by melting scrap.

a) Crackdown on induction furnaces

The induction furnaces in China have been a thorn in the eye of Chinese steel industrial policy since 2002, but have largely been successful in evading measures. However, the crackdown on the elimination of induction furnace capacity gained momentum only in 2017. With most induction furnaces operating illegitimately, official capacity figures do not exist. Nonetheless, as per market sources, China was able to eliminate 140 MnT of induction furnace capacity in 2017.

b) New capacity replacement rules

With the closure of polluting blast and induction furnaces, country’s government have been encouraging replacement of existing capacities with EAFs (Electric arc furnaces) that uses scrap and electricity to produce steel and are therefore more environment-friendly.

However, replacement of existing capacities with EAFs does not comes easy in China as in Jan’18, the country issued stricter rules on building new steel production capacity in order to replace obsolete facilities.

As per the new rules, the country allows one tonne of new capacity to be built for a minimum of 1.25 tonnes of old capacity closed in environmentally sensitive regions with effect from this year. This means that the steelmakers that plan to build new capacities will have to shut a certain number of existing ones first. Also mills that have closed illegal capacities or obtained financial and policy assistance to help shut plants will not be allowed to build new ones.

The new guidelines even include clearer details on closing capacities to build new plants, based on the size of the blast furnace, converters and other facilities to be shut down.

The strict standard on capacities swaps thus eased market worries that China will not loosen its restrictions on building new projects.

c) China’s upcoming EAFs capacities

Between Jan’17 to Apr’18, China has granted approvals for the installation of new steelmaking facilities with a capacity of 149.8 MnT per year against the closure of 169.7 MnT per year of steel capacity as a part of its capacity replacement campaign.

The new capacity, most of which has no fixed timetable, will come on stream mainly over 2018-20. Of the total new capacity, about 51.4 MnT per year, or 34%, will use electric arc furnaces, while the rest will be converters. About 11 MnT per year of this new EAF capacity will replace converters while the rest will be the replacement of existing EAFs.

China’s industry experts have estimated that China’s operational EAF capacity which was 65 MnT in 2017 is expected to reach 137 MnT by the end of 2018 and 200 MnT by 2020.
Subsequently, China’s EAF steel output which was 52 MnT in 2017, is expected to reach 82 MnT in 2018 and 120 MnT by 2020.

These new rules are a sign China will continue to deepen its efforts to push supply-side reform and reduce overcapacity in the sector. Industry sources are of the opinion that the manufacturing industry and infrastructure construction will be new rising drivers for China’s steel demand. While country’s steel demand from the property will trend down, demand manufacturing industry will be steadily rising in the future.

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