China’s Steel Industry Faces Harsh Reality as Overcapacity Compounds Other Issues

Employees work on a steel tube tower production line at a factory in Haian, Jiangsu Province, China, on Sept. 1, 2024. STR/AFP via Getty Images

China’s steel industry is facing a reckoning amid overcapacity, reduced domestic demand, and global resistance to Chinese dumping. Insiders say the sector needs to remove 20 to 30 percent of its current capacity.

Powered by the property market, which accounts for about 30 percent of domestic steel consumption, 28 out of 34 provinces and equivalent administrative divisions currently produce steel. But the industry is being dragged along as the property sector deals with its own issues of excess.

China’s new home construction starts dropped by 23.7 percent for the first half of this year compared with the same period in 2023, data from China’s National Bureau of Statistics show. The China Iron and Steel Association shows a 70 percent decline in profits from 2021 to 2022 for major industry players.

China’s steel problem affects more than just the industry, and top steel bases near megacities such as Beijing, Shanghai, and Chongqing are on track to become China’s rust belt.

Local governments in China are heavily indebted and facing reduced revenue because land sales have declined. At the same time, Beijing is demanding that local leaders achieve competing priorities simultaneously: reduce capacity, meet local gross domestic product growth targets, and maintain stability.

That’s a daunting task. In Hebei, which surrounds Beijing, the steel industry makes up about a quarter of the provincial GDP. Closing mills there could cost millions of people their jobs, slash revenue, and bring about social unrest.

The drivers for local resistance that former Chinese premier Wen Jiabao encountered in his capacity reduction effort two decades ago are still in play, according to Mike Sun, a U.S.-based businessman with decades of experience advising foreign investors and traders doing business in China.

Sun said the steel problem reflects the structural issue of how politics controls the economy in China—eventually, local governments will try to extract money from their people through measures such as increasing utility prices.

Decades-Long Problem

After its initial failure to address overcapacity in the 2000s, the Chinese regime tried to cut steel supplies in 2016 and 2017 by offering subsidies to manufacturers to compensate for the revenue loss and raising electricity prices for those who kept producing at capacity.

When that didn’t produce the intended results, the Chinese Communist Party (CCP) introduced a nationwide capacity swap program in 2018. The purpose was to replace existing production with higher efficiency and more environmentally friendly capacity while removing excess.

On Aug. 20, the CCP suspended the swap program, saying it would evaluate the results and revise the policy accordingly.

According to S&P Global, a leading market research firm, China’s steel swap program resulted in a net capacity increase. During the three-plus years between 2021 and August 2024, the total newly commissioned versus retired crude iron and steel capacity was 33 million metric tons.

The research firm expects China’s steel demand to decrease to about 750 million to 800 million metric tons a year in the next five to 10 years, a decline of about 20 to 25 percent from the 1 billion metric tons in 2020 and a 15 percent drop from the 2023 level.

China’s political and industry insiders have a similar outlook.

Earlier this year, Hu Wangming, CCP secretary and chairman of Shanghai-based China Baowu Steel Group Corporation, the world’s largest steelmaker, said China’s steel industry is going through a “harsh winter.”

Meng Fanying, Party secretary and chairman of Inner Mongolia-based Baogang Group, told Chinese media that the steel industry has entered an “ice age” and is facing a grim situation in an era of fierce competition. Both companies are state-owned.

Chen Leiming, executive president of China National Association of Metal Material Trade, told Chinese media that more than 30 percent of Chinese steel companies would have to shut down.

Laborers work at a steel plant of Shandong Iron & Steel Group in Jinan, Shandong Province, China, on July 7, 2017. Stringer/Reuters

‘No Intention’ to Reduce Production

Although the message of a severe industry shake-up is written on the wall, steel mills have “no intention to reduce steel production” because they still make a little profit and are hoping for more stimulus for the property and infrastructure sectors, according to the S&P Global report.

Chiou Jiunn-Rong, a professor of economics at the National Central University in Taiwan, observes a similar “no intention” reaction from local governments.

He said reducing capacity is only a slogan because local governments view the steel industry as a golden goose and won’t give it up easily.

Chiou said that if local governments follow the central CCP’s call to eliminate excess steel capacity, they will have to bear a revenue loss, assist the troubled steel mills in paying off debt, and help laid-off employees find new jobs.

Local officials will, therefore, “seek every opportunity not to comply with the directives to remove excess capacity,” Chiou told The Epoch Times.

Local governments have also tried to implement other measures without authorization to attract the attention of central CCP leadership and show their lack of money, Sun said.

For example, many provinces, including coastal Guangdong and Jiangsu, have increased local residential utility prices, usually set by the Price Department at the National Development and Reform Commission at the central CCP level.

‘Highly Political’

Experts say that local governments resist capacity reduction partly because they want other locales to do it first so they don’t have to go through the pain themselves.

William Lee, chief economist at the Milken Institute, an economic think tank based in California, said the overcapacity issue mirrors the political disputes within the CCP.

Local governments prefer to have excess capacity because they can export those products, “one of the few ways local governments can earn money,” Lee told The Epoch Times.

“The central government redirects the national subsidies towards certain provinces, and it’s going to have to choose winners and losers, and that’s going to be highly political,” he said.

Given the complexity and opacity of CCP politics, this benefits distribution depends largely on the political relations between local officials and the faction controlling the central treasury. For example, the Shanghai Gang, a group of regime leaders that formed around CCP leader Jiang Zemin and long dominated the finance sector, is likely to fall out of favor, according to Lee.

According to Sun, who has consulted for businesses in the steel industry for decades, CCP leader Xi Jinping wants to consolidate China’s steel industry into a few national champion state-owned enterprises to monopolize the sector globally. He predicted that China will continue to flood global markets despite that the United States, the European Union, and Canada have imposed tariffs to curb China’s dumping.

Chiou said much the same. “Due to China’s global dumping, the trade friction between China and the rest of the world, including the United States, is likely to remain the main theme of international trade,” he said.

Xin Ning contributed to this article.