China Steel Output Climbs Despite Capacity Cuts – Analysis
By Michael Lelyveld
Despite two years of cuts, China’s steel industry remains stuck in a trap of high production and pollution, leading to environmental damage at home and trade conflicts abroad.
As the producer of half the world’s crude steel, China has responded to international pressure with pledges to cut its vast manufacturing overcapacity, which has been blamed for unfair competition and job losses for a decade or more.
In January 2016, Premier Li Keqiang first promised to reduce China’s annual steel production capacity by 100-150 million metric tons, without saying when.
Days later, the cabinet-level State Council said the cuts would take place over five years. Still later, the time frame was modified to “three to five years,” raising expectations that the goal would be met by 2020.
At first, the industry moved slowly to meet the annual reduction target of 45 million tons for 2016, prompting government warnings and a speedup in shutdowns in the second half of the year.
In the end, the industry claimed it had exceeded the target, eliminating 65 million tons of capacity by the close of 2016.
But the abrupt cuts coincided with a surge in demand for steel, spurred by the government’s own economic stimulus and infrastructure programs.
Steel prices climbed, causing closed mills to reopen. A study sponsored by the environmental group Greenpeace East Asia found that 54 million tons of capacity had restarted, raising doubts about what was achieved.
The spike in steel output was also blamed for last winter’s outbursts of coal-fired smog.
This year, similar forces have been at work as the industry achieved its 2017 target to close 50 million tons of excess capacity.
By midyear, shutdowns had reached 42.39 million tons, according to the China Iron and Steel Association (CISA). The annual goal for closures was reached by the end of August, the official English-language China Daily said.
But the capacity cuts have done little to restrain China’s crude steel production, which set a series of monthly records over the summer, hitting 74.59 million tons in August, even as the shutdown goal was achieved.
In fact, the government-driven capacity cuts have had a contrary effect on production, by creating the appearance of a tightening market, pushing up prices and encouraging more output.
“Prices are rising in 2017 due to government effort [sic] to close small mills that churn out low-quality steel made from scrap metal. As a result, a batch of money-losing producers begin to make a profit,” said CISA’s executive vice-chairman, Gu Jianguo, as quoted by the official Xinhua news agency on Nov. 27.
On Monday, CISA said that steel export prices in October were the highest since February 2014, Xinhua reported. In the first 10 months of 2017, prices were up 43.1 percent from a year before, although exports were down 30.4 percent.
Effect of anti-smog measures
In addition to the profit incentive, the government’s recent anti-smog measures may have inadvertently spurred production by threatening to close northeast steel mills for the entire winter heating season from mid-November to mid-March.
The effect has helped to boost steel prices.
“The war on smog has pushed spot Chinese steel prices to a nine-year high last week amid tighter supplies and unexpectedly healthy demand, especially in east and southern China,” Reuters reported on Dec. 11.
The interruptions may have added to anticipation of a tighter market and forced steelmakers to compensate by adjusting schedules for higher production in the prewinter months.
Through October, crude steel production climbed 6.1 percent from the year-earlier period, the National Bureau of Statistics (NBS) reported.
In November, production of 66.15 million tons fell 8.6 percent from the October level, thanks to the anti-smog shutdowns. But last month’s output still rose 2.2 percent from a year before, Reuters said.
Through 11 months, steel production remains 5.7 percent above the year-earlier period, the NBS said.
The unintended consequences of downsizing are possible because China’s steel production capacity still exceeds output by a wide margin, allowing the government to claim it is cutting while the industry is raising production at the same time.
The exact size of the capacity surplus has been hard to pin down.
Before the 2016 cuts started, overcapacity was widely estimated at 326 million tons, based on a capacity figure of 1.13 billion tons from the Ministry of Industry and Information Technology (MIIT) and 2015 production of 803.8 million tons, as reported by the NBS and the World Steel Association.
The huge surplus is more than the combined crude steel output of the second, third and fourth largest producers — Japan, India, and the United States — leaving plenty of room for both production increases and capacity cuts.
Some reports put China’s excess at nearly 400 million tons, based on a CISA capacity estimate of 1.2 billion tons at the end of 2015.
Either way, the promised reduction of up to 150 million tons would do little to curb China’s actual output.
China produced 808.4 million tons of crude steel last year, according to World Steel Association figures.
The country’s domestic consumption is expected to rise 7.7 percent this year to 725 million tons, the China Metallurgical Industry Planning and Research Institute said.
China’s steel demand is forecast to increase 0.7 percent in 2018 to 730 million tons.
Not China’s problem alone
Responding to continued international pressure and the threat of new trade measures, officials have repeated the government’s longstanding argument that the overcapacity problem is not China’s alone.
“Steel overcapacity is a common challenge facing countries across the world, rather than a problem unique to one country,” Assistant Minister of Commerce Li Chenggang told a press conference at a steel conference in Berlin on Dec. 1, according to Xinhua.
China’s high production levels have been a major source of tension with trading partners in Europe and the United States.
In April, U.S. President Donald J. Trump ordered an investigation under the rarely-used Section 232 of the Trade Expansion Act of 1962 to determine whether steel imports from China pose a national security risk.
U.S. Commerce Secretary Wilbur Ross has until mid-January to complete the probe, Reuters said.
In a posting for the Peterson Institute of International Economics in Washington earlier this year, research analyst Zhiyao Lu examined the questions of how much spare capacity China needs to respond to increases in demand or operational issues and how much is real overcapacity.
Lu concluded that nearly 200 million tons of spare capacity is “within the reasonable range” for China’s industry, based on 2015 figures, leaving some 130 million tons as excess.
But the analysis also found that official reports on capacity have mixed iron and steel together in their totals, making it hard to know how much crude steel capacity has really been cut.
“In order to clearly track the progress of capacity reductions and implement effective policies to tackle the issue more efficiently, the Chinese government should separate the two sectors, set clear goals for each of them, and supervise each industry independently,” Lu said.
Putting questions of data manipulation aside, it could be argued that China’s steelmakers are only responding to market forces by producing more when rising prices signal an increase in demand.
But Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, rejected the idea that the Chinese steel industry is engaged in any meaningful reforms.
Local governments are “still heavily subsidizing their steel firms so that some other province’s firm will be the one to reduce output,” Scissors said by email.
The central government is also “heavily subsidizing the companies it has chosen to be the surviving players in the consolidation that never happens,” he said.
“Everyone wants someone else’s firms to die and the central government has manifestly failed to impose any lasting discipline,” Scissors said.