China’s Steel Capacity Rising Just as Demand is Weakening

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A recent Platts report offers a worrying picture of overcapacity in the Chinese steel market, which could have ramifications for steel prices worldwide.

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When Europe or the U.S. has an overcapacity issue, domestic producers suffer and domestic prices are depressed, but the effects rarely ripple much beyond the region’s borders.

But in part because of China’s dominance in the steel sector — producing over half the world’s steel — and in part because Chinese producers use exports to dump excess production when the country produces more than it consumes, the rest of the world feels the impact through increased exports of low-cost steel products.

China has been engaged in a multiyear program to shutter outdated, more polluting steel capacity. New additions have been authorized only on a replacement basis, but Platts’ analysis suggests plants that have been closed for some years but not pulled down have been allowed to count towards the construction of new, far more efficient steel plants.

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

In the September-October period of this year alone, China approved eight steel capacity replacement projects, Platts reports, which will see 17.18 million mt per year of pig iron and 13.56 million mt per year of crude steel capacity commissioned in the next 3-4 years.

The new projects are predicated on closures of 19.52 million mt per year of pig iron and 15.21 million mt per year of crude steel capacity (5.18 million mt per year of pig iron and 2.16 million mt per year of crude steel capacity were already closed before the end of 2018).

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

The problem is further exacerbated by actual output from new facilities being even higher than headline capacity, Platts reports. The new facilities can produce up to 20% more than the stated installed capacity, possible through improved production technologies — by adding more scrap into the iron and steelmaking process — and by using higher-grade iron ore, the article states.

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Steel demand in China, at least from the construction sector, has been robust this year.

But worrying signs are appearing that supply is exceeding demand.

Rebar margins have fallen to just $29/mt during July-September from $159/mt in the same period last year.

Manufacturing is depressed, particularly in the automotive sector. The property sector is expected to weaken next year as new plants come onstream looking to run at 100% capacity to recoup investment; increased exports may be the inevitable result.

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