China’s Ministry of Industry and Information Technology has halted its “capacity replacement” policy in the steel manufacturing sector due to declining profits. The program, which has been in effect since 2021, was suspended on August 23, meaning that new applications for steel production under the program will no longer be approved. The ministry stated that the policy regulation is no longer applicable due to the “new challenges” faced by the steel industry and that a new policy is being developed to replace it.
Under the capacity replacement program, steel manufacturers were required to remove a certain amount of existing capacity when constructing new steel plants. In environmentally sensitive areas, for every metric ton of added production capacity, 1.5 metric tons of existing capacity had to be shut down. In other areas, this ratio was 1.25 metric tons of existing capacity for every metric ton added.
Experts have differing interpretations of what this suspension means. Sun Kuo-hsiang, a professor at Nanhua University in Taiwan, believes it is a temporary measure and does not completely ban the construction of new steel plants until new policies are established by the ministry. On the other hand, Chinese American economist Davy J. Wong argues that it should be seen as a ban on building new mills given China’s evident production overcapacity.
China’s domestic demand for steel has dropped by over 10 percent since 2020, leading to plummeting prices and exacerbating the crisis in China’s steel industry. Hu Wangming, chairman of China Baowu Steel Group—the world’s largest producer—stated at a recent conference that the industry is facing an even more severe situation than in previous years.
The suspension of capacity replacement is seen as an emergency measure taken by Chinese authorities to address overcapacity issues caused by shrinking domestic markets and increased exports resulting from dumping practices abroad. However, trade restrictions imposed by Western countries have further worsened China’s predicament.
The real estate crisis and reduced infrastructure investment have also contributed significantly to China’s overcapacity problem as they have led to decreased demand for construction materials like steel and cement.
Both Sun Kuo-hsiang and Davy J.Wong agree that these challenges reflect long-term structural problems within China’s economy and industry which need careful consideration moving forward.