China Puts Brakes on New Steel Mills With Industry in Crisis

(Bloomberg) -- China has abruptly suspended its system for approving new steel plants, as the government responds to a deep demand slump that’s crushed industry profits and fueled a surge of exports.

Beijing has for years required the elimination of existing capacity as a condition of building new plants. Those rules will no longer apply from Friday and the government will develop an alternative program, the Ministry of Industry and Information Technology said in a statement.

There have been growing calls for action from the Chinese authorities in recent months as steel prices plunged amid a worsening glut. Demand has fallen more than 10% since 2020, and many analysts say the industry will need to shrink to fit an economy that’s becoming less reliant on steel-intensive construction.

Chinese steel exports have ballooned this year to their highest since 2016, a sign that mills are struggling to find domestic markets for about 1 billion tons a year of output.

“Our view is that this move would not do enough to meaningfully phase out excess capacity,” Citigroup Inc. analysts including Jack Shang said in a note. “We believe the weakening demand on the ground calls for more drastic measures (aggressive production control etc.) along with strong government enforcement.”

The head of China Baowu Steel Group Corp., the world’s biggest producer, warned last week that the industry faced a situation worse than the crises it endured in 2008 and 2015. Global peers — including ArcelorMittal SA — have also complained about the impact of rising Chinese exports.

Market reaction to the latest announcement was relatively muted, with steel futures up slightly in Shanghai. A key issue is that many new plants have already been approved and could enter the market anyway in the coming two years. Citigroup estimates more than 80 million tons of approved capacity is not yet online.

“The supply and demand relationship in the steel industry is facing new challenges,” the ministry said in the statement. “There are still problems such as inadequate policy implementation, imperfect supervision and implementation mechanisms, and incompatibility with the industry’s development situation and needs.”

Iron ore prices have fallen as the dire situation facing Chinese steelmakers became more apparent in recent weeks. They’ve lost around 10% this quarter and touched the lowest since 2022 last week. Futures in Singapore dropped 1.1% on Friday to $96.25 a ton as of 2:20 p.m. local time, trimming a weekly gain.

More Serious

Beijing first introduced so-called “capacity swaps” for heavy industries including steel in the middle of last decade, as the government began to tackle untrammeled expansion. Under the latest rules introduced three years ago, each ton of annual steel capacity added in environmentally sensitive areas had to be matched by the closure of 1.5 tons of existing capacity, or by 1.25 tons in all other areas.

But there were also significant exceptions, largely designed to encourage “electric arc furnace” plants that rely on scrap — rather than the coal-fired blast furnaces that dominate China’s industry.

“The capacity swap program has actually led to growth, as mills often opted to demolish outdated plants for bigger ones,” said He Jianhui, an analyst at SDIC Essence Futures Co. “Now that the whole industry demand is clearly declining, overcapacity is becoming more and more serious, and this document from the ministry is sending a signal of control.”

The ministry said it would accelerate research into a new capacity-swap policy. Local authorities that announce any new replacement plans would be deemed to have added capacity illegally, it added.