The Chinese steel sector has entered a period of slower growth. Annual double digit percentage increases in steelmaking will not be repeated in the future. Last year’s rate of expansion was just 3.2% percent.

Sheffield market analysts, MEPS reports that an average figure of 5% growth is likely, at best, during the rest of this decade.
In 2012, the majority of Chinese steel companies operated at a loss. The mills were unable to obtain realistic prices because the market was oversupplied. Substantial amounts of new capacity have been added during the past decade. This has improved productivity and product quality at the new plants. Unfortunately, much of the outdated, inefficient, and polluting facilities continue to operate.

The current method of making investments, on a provincial basis, does not meet the requirements of the industry as a whole. There is no incentive to cut capacity. The key motivation, currently, is to approve more and more investment. This year to date, announced steelmaking capacity increases are three times higher than closures. This is in a country which already has massive oversupply.

The lowest estimate suggests that the steel sector has 20% excess capacity at presen, but the figure could be as high 30%. The international norm is 10-15% to cover maintenance stoppages and unforeseen factors. This suggests that China has, currently, at least 75Mt of unused production potential. To put this figure into context, China’s excess capacity is the same size as the total output of the world’s fourth largest producing country last year.

It is essential that the industry continues to invest in the latest technology. However, high expectations of future steel demand need to be reduced, particularly at the provincial level, where investment decisions are considered. A national plan to restrict net capacity increases to tonnages in line with forecast demand needs to be devised and implemented as soon as possible. Without this type of initiative, the steel industry will remain one with constantly poor profitability, perpetual overcapacity and low mill selling prices. Investment in steel cannot be left to the provincial authorities alone.

Steelmakers in China buy most of their raw materials at global market prices. With modern plant operations, manpower represents only a small part of total steelmaking expenditure. Therefore, the low labour costs in China do not provide any significant advantage over international competitors, particularly if a significant proportion is produced in over manned, inefficient and heavily polluting factories.

The steel industry in China needs to adopt a new approach to managing the industry. Most decision makers have spent the last twenty years considering one thing - how to grow their business. Now the picture is much more complicated. Many company chiefs will be faced with dealing with plant closures. This is an unpleasant task and one in which they will have little or no experience.

The government is considering stricter standards for emissions from steel plants. If applied, this should require the most heavily polluting units to shut down.

Job creation needs to be undertaken in the regions where plant closures take place. This could be from within or outside the steel sector. Decimating steel towns without replacement jobs can be an industrial relations disaster, as seen in many western countries over the past 25 years.

Source: MEPS China Steel Review