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Analysis: China looks overseas for steel capacity expansion

Analysis: China stares at steel overcapacity amid replacement facility growth

Singapore — China is approving new steel facilities at a rapid pace, raising the specter of a steel oversupply that could once again undermine global steel prices.

China approved eight steel capacity replacement projects over September to mid-October that will see 17.18 million mt/year of pig iron and 13.56 million mt/year of crude steel capacity commissioned in the next 3-4 years, according to S&P Global Platts analysis.

The new projects are predicated on closures of 19.52 million mt/year of pig iron and 15.21 million mt/year of crude steel capacity.

However, 5.18 million mt/year of pig iron and 2.16 million mt/year of crude steel capacity were already closed before the end of 2018.

This means there will be just 14.39 million mt/year of pig iron and 13.04 million mt/year of crude steel capacity closed during 2020-23, resulting in a net increase of 2.79 million mt/year of pig iron and 0.51 million mt/year of crude steel capacity over the period.

Though China has effectively banned additional steel production capacity, a net increase in overall output is occurring in two key ways: new facilities are replacing the ones that have, in some cases, been closed for a long time; and the iron and steel works are bigger and more efficient than the ones they are replacing.

In total, 208.57 million mt/year of new crude steel capacity will be commissioned over 2019-23, based on closures of around 228.97 million mt/year, according to Platts analysis. Out of the total closures estimate, 58.05 million mt/year have already been shut down prior to 2019.

Platts estimates China's net crude steel capacity expansion will total 37.65 million mt/year over 2019-23, of which 34.88 million mt/year is due to come online in 2019. This will take China's total crude steel capacity to around 1.2 billion mt/year by the end of this year.

OVERCAPACITY LOOMS

There are some in China's steel market who believe the real net crude steel capacity expansion figure could be even higher as new facilities can produce up to 20% more than the installed capacity.

This is made possible through improved production technologies, by adding more scrap into the iron and steelmaking process, and by using higher grade iron ore.

But as China's steel capacity continues to rise, domestic steel demand is waning.

"If it were not for the strong property construction sector in 2019, overcapacity would have already returned in the steel industry," one mill official said.

China's average rebar sales margin decreased to $29/mt over July-September, down from $153/mt during the same period of 2018, Platts analysis showed. The average Chinese domestic rebar prices in Beijing spot market in during the third quarter dropped 11.4% year on year to Yuan 3,847/mt ($543/mt).

Property construction is expected to weaken next year, while there is still no sign of any meaningful recovery in manufacturing.

Further, it is considered unlikely that Beijing will order another round of capacity elimination as Chinese steel works are mostly equipped with up-to-date technology and meet environmental protection standards.

Market sources market said business was likely to be tough for less efficient steel mills in coming years amid fierce competition. But it could present an opportunity for stronger mills to consolidate through mergers and acquisitions.

-- Analyst Jing Zhang, jing.zhang@spglobal.com

-- Edited by Debiprasad Nayak, debiprasad.nayak@spglobal.com