LINK NEW STEELMAKING CAPACITY ADDITIONS WITH PLANT CLOSURES
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 3.2 percent. MEPS
reports that an average figure of 5 percent 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much of the outdated, inefficient, and polluting facilities continue to be
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 has massive oversupply.
The lowest estimate suggests that the steel sector has 20 percent excess
capacity at this time. The figure could be as high 30 percent. The international
norm is 10/15 percent to cover maintenance stoppages and unforeseen factors.
This suggests that the industry has, currently, at least 75 million tonnes 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 percentage 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
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 allow the most heavily polluting units to be
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 last 25 years.
Source: MEPS China
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