China’s Ministry of Industry and Information Technology has suspended its “capacity replacement” policy in the steel manufacturing sector, as the profits of China’s steel industry continue to plummet.
The replacement program that has been in place since 2021 was put on hold on Aug. 23, meaning that applications for new steel production under the program will no longer be approved.
In a statement, the ministry said that the policy regulation is no longer applicable because of “new challenges” that the steel industry is facing, and that authorities are creating a new policy to replace it.
The capacity replacement program in the steel industry required steel manufacturers to remove a certain amount of existing capacity when building new steel plants.
Specifically, for every metric ton of steel production capacity added in certain environmentally sensitive areas, 1.5 metric tons of existing production capacity was required to be shut down; in all other areas, for every metric ton of steel production capacity added, 1.25 metric tons of existing production capacity was required to be shut down. There were some important exceptions, such as “electric arc furnace” plants that use mostly scrap steel. Companies often built new facilities during the replacement process.
Experts have different interpretations of what the suspension of the policy means.
Sun Kuo-hsiang, professor of international affairs and business at Nanhua University in Taiwan, told The Epoch Times on Aug. 24 that the pause doesn’t mean a complete ban on the construction of new steel plants.
“This measure just temporarily suspends the policy requirement for building new steel factories,“ he said. ”It’s still waiting for the new policies to be put in place by the ministry as to whether companies will be allowed to build new steel plants or not, and on what conditions.”
Chinese American economist Davy J. Wong said that the suspension should be a ban on building new steel mills.
“Production overcapacity is already very obvious, so it should mean that no new construction will be allowed to increase production capacity,” he told The Epoch Times on Aug. 24.
China’s domestic steel demand has fallen by more than 10 percent since 2020. As the production overcapacity has intensified, steel prices have plunged by 38.7 percent in recent months, deepening the crisis in China’s steel industry.
Weak Domestic Demand, Dumping in the West
Sun said that the suspension of the capacity replacement is an emergency measure taken by Chinese authorities to deal with the overcapacity problem. The increase in exports is “the result of overcapacity and China’s shrinking domestic market.”“However, Western countries’ trade restrictions on China’s dumping have exacerbated the severe situation currently facing China’s steel industry,” he said.
China’s steel exports have surged this year to their highest level since 2016, finding outside markets to absorb the nation’s 1 billion tons of annual production volume. However, the cheap Chinese steel products flooding foreign markets have also increased Beijing’s trade disputes with other countries.
China’s real estate crisis, which has been going on for years, has severely affected domestic demand for construction materials, and heavily indebted local governments have been tightening infrastructure investment; both have contributed to the worsening of the overcapacity problem in China’s steel industry.
“The real estate development slowing down or even stagnating in recent years has led to a sharp decline in demand for steel, cement, and other construction materials,” Sun said.
“In addition to the construction sector, the growth of China’s manufacturing industry has slowed down as well, which has also reduced demand for the steel industry.”
China’s industrial and economic slowdown involves reduced export demand and weak domestic demand, “which reflects the difficulties faced by China’s industry as a whole,” he said.
Wong concurred, adding that the weak domestic demand in other sectors has exacerbated the predicament of the steel industry.
Long-Term Structural Problem
The Chinese economy has increasingly depended on exports to absorb its steel production overcapacity caused by insufficient domestic demand—however, it’s not a long-term solution for China, Sun said.“China is facing the challenge of economic downturn, especially in the industrial field,“ he said. ”Despite the state’s various stimulus policies, there is no way to improve China’s economic growth. These altogether indicate that China’s current industry and economy have structural problems reflected in a period of adjustment. So how to balance growth and overcapacity reduction is the most important long-term goal.”
Wong agreed, noting that China should have continued to focus on exporting the three most mature products: home appliances, furniture, and clothing.
“But now Chinese authorities have changed their thinking. Instead of protecting the three mature ones, they’ve shifted focus to develop the so-called new three products for exports: electric vehicles, lithium batteries, and solar panels,” he said.
“However, these new industries have been successively sanctioned by major sales markets in Europe and the United States, so we can see that China’s overall economic situation is very bleak.”
