FEATURE: China to revise rules for new steel projects

A Chinese government-backed thinktank has begun the formal process of tightening rules and closing loopholes in the country’s long established ‘capacity swap’ system governing the installation of upstream and downstream steel facilities.
The Beijing-headquartered China Metallurgical Information and Standardization Institute is collecting opinions from interested parties on how to further standardize regulations relating to “old-for-new” domestic steel capacity projects. In a notice issued on April 11, the institute was soliciting comment on every aspect of the steel capacity swap process and would accept public submissions until April 21. Affiliated with China’s powerful State-owned Assets Supervision and Administration Commission, the public institution has long been a participant in drafting and revising policies guiding the country’s steel sector, Mysteel Global notes.

Nearly a decade ago, growing alarm in the central government at the speed with which new steel capacity was being added and concern about whether present and future demand projections justified the rush to build, Beijing in Oct 2013 banned the introduction of new steel capacity, reinforcing this edict a few years later in December 2017  stating that steelmakers must strictly adhere to the rules that new capacities were forbidden. Steel enterprises were only permitted to install new facilities if existing facilities of the same or greater capacity were stopped and dismantled.

To the government’s policy planners, the beauty of the old-for-new capacity swap scheme lay in the fact that old, inefficient and polluting facilities such as blast furnaces and electric arc furnaces would be replaced by clean, green, state-of-art units with no burden of new capacity being added.

At its introduction, the scheme mandated that many rules and regulations be followed relating, for example, to the operational status of the furnaces being scrapped and swapped. However, over the years Beijing has identified loopholes and shortcomings in the scheme which it is now determined to close while at the same time, helping to optimize the industry’s structure.

In an announcement issued earlier this year on January 23, the Ministry of Industry and Information Technology (MIIT) instructed that effective the next day, no domestic steelmaker would be allowed to apply for a capacity swap, nor would they be able to call for public submissions regarding any new steel capacity replacement projects, as Mysteel Global reported.

MIIT noted that some projects implemented since 2016 did not have all the necessary qualifications or approvals, while the plant layouts and sizes of some projects were “irrational”. It indicated that some steelmakers had even bent the rules to expand capacity. Consequently, improvements were needed for the regulations to help the steel industry develop healthily, the ministry warned. 

Wide ranging brief

The Standardization Institute’s call for submissions is formalizing this process, and according to its April 11 announcement, the institute’s brief seems wide ranging.

For example, based on the changes seen in the country’s environmental protection requirements and the current situation regarding atmospheric pollution, the institute is considering redefining those regions previously named as environmentally vulnerable, namely the Beijing-Tianjin-Hebei region, the Yangtze River Delta and Pearl River Delta, the notice says.

Currently in environmentally sensitive areas such as Tangshan in North China’s Hebei province and East China’s Shanghai, steelmakers wishing to install new melt shops are required to observe an old-for-new capacity swap in the ratio of 1:1.25 but the ratio could well be expanded. Similarly, in less environmentally sensitive areas, until now steelmakers have been only required to remove the same or larger old capacity when installing new, but the notice indicated that a more precise ratio might be introduced for such areas too.

The notice also mentioned that ways to improve steel capacity relocation practices would be examined, and that more specific and detailed regulations on capacities waiting for auction should be introduced too. 

Seaside steel

Steel capacity relocation is a complicated issue in China, despite the government’s best intentions. Capacity relocation is not simply equivalent to moving steel plants to coastal areas, according to Lv Guixin, a MIIT senior official. Steel works that are benefiting local economies and are necessary for local business communities should be relocated within the same jurisdiction, while some areas seriously burdened by excess local capacities should plan relocation, Lv acknowledged at the Mysteel Bulk Commodities Week 2020 forum held last December in Shanghai.

Steel capacity swap projects are aimed at preventing capacity expansion and air pollution, as well as encouraging the utilization of advanced and environmentally friendly equipment, a Shanghai-based steel analyst said. “However, on the contrary, these might cause capacity to rise because some mills bought a capacity ‘quota’ from others to build new works, but the capacity they bought should have been recognized as qualifying for the swap and yet perhaps it wasn’t,” he explained. 

Under the capacity swap scheme, mills wishing to build new capacity can either scrap their existing capacity – say, an old furnace or converter within the same works – or they can ‘buy’ the quota from another steelmaker with capacity already scrapped. A problem that has emerged is that some mills have bought quotas from other mills found to be unqualified, such as a furnace that should be been stopped and demolished but which in fact is only idled and could be restarted at any time, Mysteel Global notes.

The changes and improvements the central government wants for the scheme come against a backdrop of China’s endeavors in eliminating surplus unqualified and outdated steel capacity since 2016, efforts that have created a rather healthy relationship between supply and demand in the steel sector and whose fruits the domestic steelmakers have been enjoying in surging profits.

Thanks to the declines in steel supply, Chinese domestic steel prices have rebounded from the bottom seen over four years ago when Mysteel’s national average price for HRB400 20mm dia rebar hit a historical low on December 14 2015 at Yuan 1,903/tonne ($269.4/t) including the VAT. As of this week on April 14, the price had roared back to Yuan 3,639/t, Mysteel’s data showed.

Source: Mysteel 

However, the rapidly surge in crude steel production last year has largely slashed steelmakers’ profits and aggravated the contradictions in fundamentals, Mysteel Global notes.

China’s crude steel production increased 7.4% on year to reach an all-time high of 996.3 million tonnes for 2019, growing faster from the 6.6% on-year rise in 2018, according to the data from China’s National Bureau of statistics. In the meantime, the gross profit of member steelmakers of the China Iron and Steel Association sharply declined 30.9% on year to Yuan 189 billion last year.

The Shanghai-based analyst expressed his concern about the intensive commissioning of newly built steel works in the future but for another reason, besides the damage too much steel might be doing to the mills’ financial performance. “New facilities will produce at higher efficiency, which means that steel production might increase at a faster pace too,” he stressed. 

In other words, while some steelmakers may be closely adhering to current capacity-swap regulations and are installing new capacity whose design capabilities exactly mirror the capacity being scrapped, engineers at company steel shops will very likely be able to tweak the performance of the machines to squeeze more production from them, boosting output.

The Standardization Institute seems to recognize this danger. In its April 11 notice, it said that besides considering more specific and detailed regulations on capacities waiting for auction, it would also examine the introduction of a “conversion method” of capacities. 

Written by Anna Wu,
Edited by Russ McCulloch,