Beijing turns up the heat on China’s steel mills with call for faster consolidation

PUBLISHED : Monday, 14 November, 2016, 8:37pm
UPDATED : Monday, 14 November, 2016, 10:58pm

Beijing has for the third time in 11 years moved its target for China’s fragmented steel sector to consolidate, returning to a more aggressive goal for 2020 despite past failures to reach its own targets.

The nation’s state-dominated steel industry, troubled by major excess capacity in low end products for the past decade, is set to undergo major consolidation so that the top 10 players will amass 60 per cent of the market by 2020, up from 34 per cent last year, under the government’s plan.

It comes at a time when surging steel prices – spurred by higher than expected demand and speculation – have seen many steel mills return to the black since April, after most suffered steep losses last year. This has raised concerns that renewed profitability may slow efforts to rid the sector of outdated capacity.

The goal, set by the Ministry of Industry and Information and Technology (MIIT) in a circular released on Monday, is more ambitious than the 2025 time frame it indicated for the same goal in an industry development policy consultation document released in March last year.

Still, the unveiling of the latest consolidation aspiration serves as a reminder of the industry’s repeated failures to reach Beijing’s moving targets.

As early as 2005, when annual steel demand growth was running at 15 per cent, policy maker National Development and Reform Commission (NDRC) had already noticed the industry’s propensity to over-build capacity and set a goal for the biggest 10 producers to take up half the nation’s output by 2010, rising to 70 per cent by 2020.

In 2010, the nation’s highest ruling body the State Council urged the industry to speed up consolidation so that the top 10 players could account for 60 per cent of production by 2015, after the ratio reached just 44 per cent in 2009.

The latest industry consolidation target looks ambitious given the track record of past targets

But a capacity expansion binge, which included small private enterprises, took hold after Beijing launched a 4 trillion yuan infrastructure-heavy economic stimulus package in 2009, resulting in the ratio diving to 34 per cent last year.

In a consultation document on the industry’s development, the ministry last year moved the goal post to 2025 for the 60 per cent consolidation target.

Analysts said the ministry’s latest decision to move the target to 2020 is ambitious, but the chances of it being reached is higher than in the past.

“The latest industry consolidation target looks ambitious given the track record of past targets,” Li Hongmei, senior editor for metals and steel at information provider S&P Global Platts told the Post.

“It could be achieved if several more mega-mergers among the top players take place, coupled with a decline in steel demand and output, and effective execution of shut-downs in uncompetitive and outdated capacity.”

The July announcement of the merger of state-owned Shanghai-based Baosteel Group and Wuhan Iron and Steel Group (Wisco) to become the nation’s largest steel maker was widely seen as heralding more mergers among the largest players.

“The ministry’s more ambitious consolidation goal reflects Beijing’s determination to get rid of inefficient capacity this time around,” said Xu Xiangchun, the chief analyst at Beijing-based consultancy Mysteel.

“Not only has it announced it would set aside 100 billion yuan to help pay for redundant staff resettlement in the steel and coal sectors, it has also unveiled new administrative means to reach the capacity reduction goal, such as financing and environmental compliance barriers.”

In the latest circular, the MIIT said no net steel capacity should be added in any region during the five years to 2020.

This means any new capacity built for projects that have previously been approved, or are under construction, should be complemented by a greater volume of outdated capacity shut-down.

For the highly-populated regions in the Pearl River Delta, Yangtze River Delta and the Beijing-Tianjin-Tangshan region, new capacity must be accompanied by a shut down of at least 1.25 times as much outdated capacity.

Steel mills that are ordered to relocate out of urban areas due to environmental reasons must only rebuild a smaller capacity elsewhere, it added.

To discourage new-build plants, it said projects that are more than 60 per cent funded by debt must be stopped. In the past, projects were typically 70 to 80 per cent debt-funded.

The MIIT said the measures would help meet its goal for the industry’s plant utilisation to rise to 80 per cent by 2020 from 70 per cent last year.

According to the NDRC, the steel industry had achieved 80 per cent of this year’s outdated facility elimination target by September.

The State Council has demanded that 100 million to 150 million tonnes of annual outdated capacity be shuttered in the five years to 2020.

The ministry has issued guidelines for the industry to reduce its annual crude steel capacity to less than 1 billion tonnes in 2020 from 1.13 billion tonnes at the end of last year.