Market Segment

IHS Global Correction & Comments on China Capacity Reductions

March 13, 2016

IHS Global Insight China Steel Analyst reported Hebei province was to remove 200 million metric tons of steelmaking capacity. Steel Market Update asked the IHS analyst (Brian Jackson) whether the Chinese mills were taking the issue of closing down capacity seriously, as these sort of promises have been made in the past with little to no results. We received both an answer to our question and a correction to their original press release:

I think China is taking this issue much more seriously now, not out of enlightenment but rather necessity. With most steel firms losing money and the construction sector extremely unlikely to rebound (in levels) in a meaningful way, the writing is on the wall that a consolidation has to take place.

During the 2000s China paid lip service to steel consolidation but demand kept booming every year and there was little need to subsidize mills’ new investment or operations. Now a majority of mills are in losses for 2-3 years and environment quality is a much more sensitive topic. Instead of mills ignoring central orders because they are flush with money, they are going to authorities asking for a lifeline, which is a huge change in the dynamic. Moreover, the central governments emphasis on increasing unemployment support for these sectors is a significant change in rhetoric that signals some big changes in the future.

A separate question: will they achieve their targets? I think that the closures will proceed more slowly than planned, probably falling short of target. Still, even making it halfway on their targets would be a huge step in the right direction.

Also, the brief we pushed out yesterday has been corrected – initial reports confused a few concepts – see below for what are viewed as more reliable numbers, although all is rumor until the formal plan is actually published, my guess in late March.

[China, Hebei] CORRECTION: Hebei to cut 120 million tonnes of steel production capacity by 2020

Hebei will reduce its steel production capacity by 120 million tonnes by 2020, or an average of 30 million tons per year, according to reports by state run Xinhua and China Daily. Additionally, officials plan to close around 60% of the number of steel mills in the province, dropping from around 400 today to 160 over 4 years.

Significance: An 8 March summary of Hebei governor Zhang Qingwei’s announcement for a steel capacity consolidation appears to have mixed several concepts now clarified in state media (see China: 10 March 2016: Hebei to close nearly 200 million tonnes of steel production capacity by 2020). In particular, the planned steel cut is from around 320 million tonnes of production capacity today to around 200 million by 2020, rather than a 200 million ton cut. Concurrently, officials plan to close 60% of steel mills (i.e. the headcount), rather than 60% of capacity (i.e. total volume across all mills). Originally reported 2017 targets in steel, cement, coal and glass appear to have been correct, although the final policy is not yet published. While the clarified 120 million tonnes of capacity closure is less than initially reported, it still represents a major challenge for Hebei’s growth prospects during the next 4 years and a doubling of prior planned cuts… The emphasis on consolidating ownership, rather than just capacity, is consistent with national plans to concentrate steel sector ownership to 3-5 conglomerates by 2025…