China Puts Brakes on New Steel Mills With Industry in Crisis

The steel industry in China, the largest in the world, is currently facing an unprecedented crisis, marked by a significant downturn in demand and profits. The Chinese government has responded to this crisis by suspending its approval system for new steel plants, a move that has sent ripples through both domestic and international markets. This suspension was announced abruptly, reflecting the urgency of the situation. Historically, Beijing has required the elimination of existing capacity before allowing the construction of new plants, a policy aimed at preventing overproduction and maintaining market balance. However, these rules will no longer apply, effective immediately. The Ministry of Industry and Information Technology (MIIT) is tasked with creating a new program to replace the old system, potentially allowing for the development of new steel plants without the stringent requirement of eliminating existing capacity.

This policy shift comes as a reaction to the current slump in demand for steel in China, which has also led to a decrease in industry profits. The government’s decision is expected to have far-reaching implications for both the domestic and international steel markets. While the MIIT has not yet announced the details of the new program, the suspension of the old system will provide companies with the opportunity to build new plants more freely. This move could lead to an increase in steel production in the near future, although it remains unclear how long the suspension will last. The decision has elicited mixed reactions from experts and industry insiders, highlighting the complex nature of the challenges facing the steel sector.

The world’s biggest steel producer, China Baowu Steel Group Corp., has issued a stark warning about the severity of the industry crisis in China. The chairman of Baowu, Hu Wangming, described the situation as a ‘harsh winter’ that will be difficult to endure, suggesting that the current challenges are more severe than those faced during previous major traumas in 2008 and 2015. Global investors are closely monitoring China’s struggling economy, with concerns about a potential recession in the US adding to the uncertainty. The Federal Reserve’s moves towards interest rate cuts are also being watched closely, as they could impact global economic conditions and, by extension, the steel industry.

China’s steel market, the largest in the world, is showing multiple warning signs due to a prolonged property downturn and subdued factory activity. Baowu Steel Group Corp., which produces around 7% of the world’s steel, is a key player whose commentary on the market is closely followed. The warning from Hu Wangming is likely to cause concern among rivals across Asia, Europe, and North America, who face competition from Chinese exports. China’s steel exports are set to reach 100 million tons this year, the highest since 2016, as domestic demand slows down. This increase in exports is putting pressure on global markets, with companies like German steel giant ThyssenKrupp AG and ArcelorMittal SA expressing concerns about China’s rising exports.

The falling prices of iron ore and steel futures in Singapore and Shanghai reflect the current market conditions, driven by China’s increasing steel exports and the resulting unsustainable market situation. Mining companies like BHP, which heavily rely on selling iron ore to China, have also been affected by these developments. The Chinese steel industry has faced major slumps during the global financial crisis of 2008-2009 and in 2015-2016, but both times the economy was revived through massive stimulus measures. However, such measures seem unlikely to happen in 2024 as President Xi Jinping aims to reform the economy. Baowu Steel Group Corp. has emphasized the need to preserve cash and minimize risks, including strengthening controls within the company and monitoring overdue payments and fake trades.

New data from the International Copper Study Group (ICSG) shows a significant surplus in the steel market, further adding to the challenges faced by producers. The lack of new housing starts in China’s real estate market and disruptions in Canada’s rail system have also contributed to the current situation. Steel output in China dropped significantly in July and is expected to continue decreasing due to struggling profits and compliance with government guidance. Only 82.94 million metric tons of crude steel was produced in July, the lowest since December 2020. China’s steel output for the first seven months of 2024 is down 2.2% from the same period in 2023, and output is expected to be even weaker in the coming months as the sector aims to meet the unofficial target of no growth in annual production compared to 2023.

Daily steel output for the first seven months of 2024 was 2.88 million tons, which would result in an annual production of 1.05 billion tons if maintained, the second highest on record after 2020. However, steel prices have been on a downward trend and are likely to continue dropping in 2024 due to weak demand from the property sector and relatively low margins. China has implemented stimulus measures to try and boost the property sector, but these efforts have not been successful so far. There is a seasonal element to China’s steel production, with a peak in the summer months for construction, but with construction in a slump, steel output peaked in May and is expected to continue decreasing.

Exports have provided some support for struggling steel mills, but they have not made a significant impact. Exports may also be under threat of tariffs, with India investigating allegations of China dumping steel into their market. Clyde Russell, a columnist for Reuters, has noted that the opinions expressed in his articles are his own and do not reflect the views of Reuters News. Russell covers trends in commodity and energy markets, with a focus on China, and has highlighted the challenges faced by the steel industry. Upcoming earnings reports from companies like Nvidia and key inflation numbers will impact markets in the coming weeks, adding to the uncertainty facing the steel sector.

China’s Ministry of Industry and Information Technology (MIIT) has issued a notice to suspend the replacement of steel production capacity, meaning no new ironmaking and steelmaking projects will be approved. This suspension is a result of the previous requirement for new projects to be approved through a capacity replacement process, where new equipment had to replace old equipment and the total capacity had to be reduced in most cases. The MIIT states that this process has led to improvements in the industry and encouraged transformation and upgrades, but there are still issues with policy implementation and monitoring, as well as compatibility with industry development.

This is not the first time approvals have been suspended, with previous suspensions in 2017 and 2020. The second version of the policy was relaunched in 2021 with increased incentives for non-blast furnace and electric arc furnace equipment. The latest suspension may result in further changes and closing of any loopholes. The MIIT cites new requirements for low-carbon development as a reason for this move, aiming to further improve the supply-side structural reform of the steel industry. Market participants anticipate an increase in the reduction ratio, which will help balance supply with the expected decline in demand. The preference for low-carbon emissions equipment is expected to continue, although there may be resistance from steel mills and local governments who may prioritize GDP and employment over new policies that require production cuts.

China’s steel industry is struggling due to weak demand from the country’s property sector, which has led to a slump in steel and iron ore prices. China produces over half of the world’s steel and is the leading consumer of steel and iron ore. Prices for steel and iron ore have dropped as China’s steel supply remains high while domestic demand is weak. China’s steel rebar prices have decreased by over 20%, and iron ore prices have dropped over 28% so far this year. The chairman of China’s largest steel producer, Baowu Steel, has stated that the industry is going through a ‘winter’ and is in a long-term adjustment period.

Bank of America’s head of research for Asia Pacific materials believes that China’s steel industry is struggling due to squeezed margins and weak demand. Muted demand for steel is expected to continue into 2025 due to a ‘very weak’ Chinese property market. Hopes for a recovery in China’s property sector have diminished as no specific measures were announced at the third plenum gathering. Excavator sales, seen as a leading indicator of construction activity and metals demand, are expected to be down 8% in China for fiscal year 2024. Commonwealth Bank of Australia’s Vivek Dhar believes that steel mill margins in China could become even more negative, putting further downward pressure on iron ore prices.

Chinese steel makers have been exporting to better markets to combat domestic losses. Several countries have accused China of dumping steel, leading to oversupply in export destinations. Chile’s largest steel mill has announced the closure of its steel operations due to the inability to compete with Chinese steel. China’s excess production of steel is causing low domestic steel prices and aggressive steel exports. The increase in Chinese steel exports in 2023 has reduced the production capacity for the rest of the world. The excess production and exporting of Chinese steel could lead to oversupply and a decrease in domestic steel prices in export destinations. Five Southeast Asian countries and South Korea are major markets for China’s steel exports.