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Industry

China completes five-year steel de-capacity task in advance, eyeing structural optimization

January 15, 2019


Abstract : China has completed the five-year de-capacity task in the steel sector in advance and cut 150 million metric tons (tonnes) of steel capacity after three years of efforts, according to a meeting of the China Iron and Steel Association (CISA) on Monday.

BEIJING, Jan. 15 (Xinhua) -- China has completed the five-year de-capacity task in the steel sector in advance and cut 150 million metric tons (tonnes) of steel capacity after three years of efforts, according to a meeting of the China Iron and Steel Association (CISA) on Monday.

Earlier, in 2016, China proposed to cut the steel overcapacity by up to 150 million tonnes during 2016-2020.

Against such background, Yu Yong, president of CISA, pointed out that the task in 2019 is to turn to the efforts of preventing resumption of the capacities that have been eliminated and focus on the capacity structure optimization, layout adjustment and mergers and acquisitions (M&As) in the steel sector.

--- Significant improvement in profitability of domestic steel enterprises

Amid the advancement of supply-side structural reform, the domestic steel industry achieved steady and positive development in 2018, with a basic balance between production and demand.

Data of the CISA shows that China produced 708 million tonnes of pig iron, 857 million tonnes of crude steel, and 1.013 billion tonnes of steel products in the first 11 months of 2018, up 2.44 percent, 6.73 percent and 8.3 percent, respectively.

In terms of price, the steel price index compiled by the CISA stood at 116.52 points on average during the period, up 9.86 percent year on year.

Thanks to the country's de-capacity efforts, the steel enterprises saw their profits surge during the period.

In the first 11 months of 2018, the combined profits of member enterprises of CISA jumped 63.54 percent year on year to 280.2 billion yuan (about 41.5 billion U.S. dollars). They earned 3.76 trillion yuan of sales revenue, up 14.17 percent year on year.

Their debt ratio declined to 65.74 percent by the end of November, down 3.39 percentage points from a year earlier, with half of the enterprises seeing a debt ratio below 60 percent.

--- Steel demand in 2019 likely to decline

China's steel demands in 2019 are expected to decline slightly as demands from the downstream sectors such as construction, energy, and automobile will likely fall, according to a forecast report by the China Metallurgical Industry Planning and Research Institute.

China remains the world's largest steel consumer. However, with the adjustment of economic structure, the main driving force for economic growth is changing from investment to consumption. In the critical period of the new growth drivers taking the place of the old ones, the new economic growth points have significantly weakened the demands for steel, said Yu.

An investigation report by the CISA points out that in the real estate sector, a big steel consumer, China is expected to see a drop in the growth rate of real estate investment and new construction area in 2019, given the tight policies on the property market and soft property sales.

Yu pointed out that the construction industry is an industry with the largest steel consumption, accounting for about 50 percent of steel consumption. Steels used in the real estate construction account for 50 percent of the total steels used in the construction industry. Given the fall in the real estate investment and new construction area, the steel demands will fall accordingly.

Affected by the adjustment of tax policy, China's automobile production and sales have declined for the first time in 28 years, said Yu, predicting that the steel demand in the automotive industry will not change much, but the profitability of auto sheet manufacturers will decline.

--- Scope of M&As in steel industry to be expanded

Yu cautioned that the foundation for sustained profitability of the steel enterprises remains weak. In particular, with the sharp decline in steel prices in November 2018, some steel enterprises were on the verge of breakeven in their main business.

The current round of steel enterprises' profit improvement depends mainly on the production capacity cut, thanks to the stringent laws and regulations on environmental protection, which is different from the cyclical recovery that relied on fixed investment to drive consumption growth in the past, said Li Xinchuang, president of China Metallurgical Industry Planning and Research Institute.

Yu pointed out that the task in 2019 is to turn to the efforts of preventing resumption of the capacities that have been eliminated and focus on the capacity structure optimization, layout adjustment and mergers and acquisitions (M&As) in the steel sector.

It is worth noting that majority of China's steel production is concentrated in north China, especially the Beijing-Tianjin-Hebei area.

Industry insiders note that it is urgent to optimize the steel capacity distribution.

According to a document released by the State Council, by 2025, the top ten steel producers in China will see their capacities account for 60 percent-70 percent of the country's total steel capacity and there will be three to four steel groups each with a steel capacity of 80 million tonnes and six to eight regional steel groups each with a steel capacity of 40 million tonnes.

Therefore, given the current situation, the country will speed up efforts to promote M&As of the domestic steel enterprises to consolidate the earlier achievement and help advance the supply-side structural reform in the steel industry, said industry watchers. (Edited by Hu Pingchao, [email protected])

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