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Analysis: China's steel capacity expansion to peak in 2019 before reduction efforts bear fruit

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Analysis: China's steel capacity expansion to peak in 2019 before reduction efforts bear fruit

  • Author
  • Zhang Jing
  • Editor
  • Wendy Wells
  • Commodity
  • Metals
  • Topic
  • President Xi's Second Term

Singapore — China's crude steel capacity expansion is likely to peak in 2019 as the rate of startups outstrips the rate of closures for one year before the two volumes move closer to parity, S&P Global Platts estimates.

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The expansion surge comes despite China's efforts over the past four years to reduce capacity as part of its ongoing supply-side reform agenda.

Chinese steel mills are only allowed to build new capacity to replace existing capacity of a similar size that they have shut down. But as most of the old capacity earmarked for removal in 2019 has been idled or closed for some time, the new facilities will result in a significant net increase in capacity this year.

Newly commissioned facilities coming online in 2019 will add 34.9 million mt/year of new capacity, taking the country's total crude steel capacity to around 1.18 billion-1.2 billion mt/year, according to Platts estimates.

In 2019 a total 51.1 million mt/year of new crude steel capacity is being commissioned, predicated on the closure of 51.9 million mt/year of old capacity, according to Platts calculations based on government announcements of new capacity approvals.

However, some 35.7 million mt/year of that 51.9 million mt/year was idled or shut down before 2019, meaning only 16.2 million mt/year will be closed during the year -- far less than the volume of new capacity being commissioned, resulting in a wide disparity between the replacement and closed capacities.

In contrast in 2020, China will commission 91.9 million mt/year of new capacity and close down 91.2 million mt/year, but only around 12 million mt/year of that old capacity was shut earlier, meaning the replacement-closure ratio will be much narrower.

China is slated to commission 21.7 million mt/year of capacity in 2021, followed by 21.1 million mt/year in 2022 and a sharply lower 7.8 million mt/year in 2023. Any net increase in capacity in those years will be negligible for the same reasons as in 2020.

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BLAST FURNACES GET BIGGER, BETTER

However, steel production growth will remain strong beyond 2019 as the new blast furnaces are bigger and more efficient than the old ones. Further, by adding more scrap into the iron and steelmaking process - or by using higher grade ores - iron and steel production can be 10%-20% higher than the installed capacity.

According to the Ministry of Industry and Information Technology, China's registered crude steel capacity was 1.13 billion mt/year in 2015. But taking into account some 140 million mt/year of "unlicensed" induction furnace capacity (closed down by the Chinese government in 2017) that was never included in official statistics, China's real capacity was closer to 1.27 billion mt/year back then, Platts estimates.

The closure of induction furnaces created a market share opportunity for registered mills - particularly rebar producers - that helped lift demand and steel prices from 2017 until the market started to decline in the fourth quarter of last year.

Stronger prices and profits after several lean years incentivized the steel capacity replacement program that is taking place now.

In tandem with rising steel capacity, China's crude steel production over January-July 2019 rose 9% year on year, or by 48 million mt, to 577 million mt. Chinese domestic rebar profit margins averaged $67/mt over January-August due to strong demand from the property sector, Platts data shows.

Though downstream demand has slowed compared with the previous two years, domestic steel consumption is likely to stay robust enough to absorb any excess steel production this year and in 2020.

Net crude steel capacity
Year mil mt/year
2019 34.9
2020 0.7
2021 3.6
2022 0.2
2023 -3.8
Source: S&P Global Platts

-- Analysis by Zhang Jing, newsdesk@spglobal.com

-- Edited by Wendy Wells, wendy.wells@spglobal.com