China aims to revive steelmaking without ordering cuts to supply

[LONDON] China is taking a measured approach to fixing its steel industry, improving the outlook for high-end companies but steering clear of ordering the cuts needed to decisively shrink supply.

The readout of China’s upcoming five-year plan was heavy on pledges to boost consumption and innovation in the economy. The government’s anti-involution campaign, targeting the overcapacity and ruinous competition that’s been a feature of the steel sector among others, drew perhaps less emphasis than expected.

Instead, Beijing seems to have committed to a more gradual tightening of the screws on steelmakers that would play out over years rather than months. The industry ministry in October proposed tougher capacity rules, so that eliminating existing operations would have to more than offset plans to add new facilities, at a ratio of 1.5 to 1. Swaps that involve upgrades to plants would get better terms. Some key hubs would not be allowed to add any capacity at all.

Putting limits on expansion, rather than forcing underperforming operations to shutter, won’t help most of the mills struggling with China’s prolonged property crash. But promoting value-added steel over commoditised items such as construction rebar suggests firms that are able to specialise will benefit.

“The future of the industry is looking brighter for the top echelon of producers,” said Tomas Gutierrez, an analyst at Kallanish Commodities. “They could be supported in boosting quality and innovation, in line with China’s broader trend to support the upscaling of productive capacity in the wider economy.”

China could still announce numerical targets on output or capacity when policymakers gather at the annual National People’s Congress in March. Indeed, the punchy rhetoric at the last meeting sparked speculation that Beijing would demand outright cuts to address the overproduction crippling the industry.

That did not happen, leaving mills to adjust output based on demand – not great, at least domestically – and margins – surprisingly good due to lower raw material costs. The upshot of the tussle is that annual production has a pretty good chance of sinking below one billion tonnes for the first time in six years.

Whatever the intentions for supply, it’s demand that’s likely to be more influential in shaping the industry’s fortunes. The government’s five-year plan does mention a batch of major construction projects that could help.

Otherwise, steel exports have been a notable bright spot for Chinese mills, but it’s not clear whether that can last as the world tilts increasingly towards protectionism. Goldman Sachs forecasts an 8 per cent decline next year, albeit to the second-highest net volume on record, according to a recent note from the bank.

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Moreover, a rising proportion of the steel sold overseas does not qualify as the high-end, finished product favoured by the government, suggesting room for improvement when it comes to upgrading the industry.

“If you look at what China’s been exporting this year, the growth has come from semi-finished steel like billets,” said Macquarie Group analyst Florence Sun. BLOOMBERG