By Zhou Jianqi

Research Report Vol.19 No.2, 2017

There are two major causes for the rapid transition of China’s iron, steel, and coal industries from downward movement to supply and demand rebalancing within a relatively short period of time. First, the domestic economy tends to be stabilized as a whole. Second, the Chinese government has combined the reduction of excessive capacity with the control of air pollution and increased its policy efforts. Despite the overall improvement of business operation, the industries still face structural challenges. As a long-term strategy, the reduction of overcapacity will have to deal with new conflicts as it moves to the next stage of implementation.

I. The Reduction of Excess Capacity in China’s Iron, Steel, and Coal Industries has Achieved Phased Results

The problem of overcapacity became especially prominent in China’s iron, steel, and coal industries in 2015 and has gradually been relieved since 2016. As of November 2016, only 22.2% of all the large and medium-sized iron and steel enterprises were losing money, a sharp drop from 50.5% in 2015. The entire coal industry managed to return to profit in August 2016, although over 90% of large and medium-sized enterprises were still losing money in 2015. That figure dropped to 70% in May 2016. According to the National Bureau of Statistics, the total profit of the ferrous metal smelting and rolling industry and that of the coal mining and washing industry from January to November 2016 achieved a cumulative growth rate of 274.7% and 156.9% year on year respectively.

The current round of cutting overcapacity in the iron, steel, and coal industries is divided into two stages. At the present stage, the government mainly relies on administrative measures that are forcibly implemented. However, when the industry was going down between 2011 and 2015, market and legal measures were given a bigger role. Following the administrative plan, China had slashed the steel and iron capacity by about 135 million tons and the coal capacity by 810 million tons up to 2015. However, much of the slashed capacity had long fallen into disuse or been abandoned. Such ‘zombie’ capacity could hardly have had as significant an impact on the market supply and demand structure as market and legal measures. According to statistics of baochunsteel.com, as of July 2016 the number of registered blast furnace companies in Tangshan has dropped by six to eight from 2014. According to statistics of Shenhua Group, the company only cut 9.4 million tons of capacity from 2014 to 2015 according to national plans but slashed another 100 million tons of capacity voluntarily, leading to a reduction of about 170 million tons of sales volume. The market started to improve since 2016. So far, the government has been playing a predominant role and continued to strengthen its administrative control by strictly implementing the 2016 overcapacity reduction plan and temporary shutdown or restriction measures. For example, the main producing areas of iron and steel were required to temporarily limit their production capacity during major events or heavily polluted days while companies in the coal industry were not allowed to operate for more than 276 days a year.

In general, although the trend of sharp decline has ended in domestic demand for steel and coal, there is still no fundamental improvement and relevant policy measures that have just constrained domestic production and helped the market supply and demand structure become stabilized. In 2016, the domestic apparent consumption of crude steel increased by only 2% year on year. However, that was still 0.8% higher than the annual growth rate of production (1.2%). From January to November in 2016, the growth rate of national coal consumption and production was -1.6% and -9.4% year on year respectively, making a sharp gap of 7.8 percentage points. In 2016, China’s steel exports fell 3.4% year on year, or down 23.4 percentage points compared with 2015. The international trade friction had its impact, but the more fundamental drive lied with the rise of domestic prices. In the same year, coal imports increased by 25.2% year on year.

II. The Next Stage of Cutting Overcapacity in China’s Iron, Steel, and Coal Industries will have to Deal with Three Conflicts

1.The conflict between the medium and long-term plan for continuously promoting overcapacity reduction and the short and medium-term trend of market supply shortage

Although overproduction is no longer a prominent issue for China’s iron, steel, and coal industries, the pressure still exists and overcapacity reduction still needs to be stressed. According to preliminary statistics, China produced a total of 808.4 million tons of crude steel and 3.364 billion tons of raw coal in 2016. Preliminary estimates showed that as of 2016 China’s production capacity for crude steel had been 1.05 billion tons and actual coal production capacity was about 4.5 billion tons. Although capacity utilization of the two industries had been greatly improved, the pressure of excess capacity still existed in general. First, production capacity might further expand as market prices start to rise. Second, there is no fundamental improvement from the demand side although market demand has gradually been stabilized and even started to take a positive turn. Third, China’s economy is transitioning from one relying on scale and speed to one driven by quality and efficiency and reduced consumption will be an important feature for the future development of the iron, steel and coal industries. Therefore, overcapacity reduction, an important part of China’s supply-side structural reform, will remain on the agenda for a long period of time.

The next stage of overcapacity reduction will have to address the conflict between the decline in total production and the shortage in market supply. From the supply side, as the current market supply capacity is restrained, the total production capacity will be seriously affected in the future. From the demand side, the market demand for iron, steel, and coal has been stabilized and is gradually improving while the demand for quality products and scarce resource remains robust and on the rise. In terms of the market demand for iron, steel, and coal in the future, two trends are worth our attention. First, the overall market demand will be stable and positive. Second, the demand for quality and state-of-the-art iron products and scarce coal products will remain robust and keep expanding. In 2017, China will rid the market of low-quality iron and steel products, thus “freeing” billions of tons of demand for quality products. The country will also strengthen its control over the use of coarse coal particles and pollution emission form the power, iron, steel, chemical and other downstream industries, which will create certain market space for clean coal products. Innovative development in such sectors as steel construction, home appliances, automobile, shipbuilding, and aviation, etc. will create demand for high-end and cutting-edge steel products and increase market demand for upstream coking coal products. A comprehensive assessment shows that the tension between supply and demand in the iron, steel, and coal industries will continue to exist in the short and medium term and thus constitutes a conflict with the medium and long-term production reduction plan.

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