[SMM Analysis] SMM's Interpretation of the "Implementation Measures for Capacity Replacement in the Steel Industry"

On May 18, the Ministry of Industry and Information Technology released the "Implementation Measures for Capacity Replacement in the Steel Industry" (hereinafter referred to as the "Replacement Measures"). SMM conducted a comparative review and analysis of the relevant content:

• Core Revisions of the Replacement Measures

The Replacement Measures further tightened capacity replacement requirements, placed greater emphasis on differentiated policy guidance, and strengthened supervision and management requirements. The main content of the revisions is as follows:

First, replacement ratios were raised. Nationwide, the capacity replacement ratios for both ironmaking and steelmaking shall be no less than 1.5:1, and the replacement ratio for mergers and reorganizations was raised to no less than 1.25:1.

Second, capacity replacement between different enterprises will be phased out. A two-year transition period was set for capacity replacement between different enterprises; after the transition period, capacity transfers may only be achieved through substantive mergers and reorganizations.

Third, a validity period was established. The validity period of replacement plans was specified as 24 months.

Fourth, equipment construction by stainless steel enterprises was standardized. The number and volume of alloy melting induction furnace equipment built by stainless steel enterprises must match the needs of their electric furnace or converter processes, preventing enterprises from abusing the name of alloy melting to build induction furnaces and add new steelmaking capacity.

Fifth, high-end and green development is supported. Differentiated replacement ratios may be applied to the construction of low-carbon smelting equipment such as hydrogen metallurgy, electric furnaces, and electric furnaces at or below the restricted category built by special steel enterprises.

Sixth, closed-loop management of capacity replacement plans was added. Provincial-level industry and information technology authorities are responsible for organizing verification of the implementation of capacity replacement plans, conducting annual self-inspections, and submitting self-inspection reports.

Seventh, policy coordination was strengthened. In areas such as environmental impact assessment, pollutant discharge permits, energy conservation reviews, and carbon emission evaluations, coordination with the policies of the National Development and Reform Commission (NDRC) and the Ministry of Ecology and Environment was enhanced to form a joint departmental effort.

• The increase and standardization of replacement ratios mean controlling the total capacity of the steel industry from the source

Compared with 2021, the newly revised "Replacement Measures" imposed stricter requirements on capacity replacement for steel enterprises. Specifically, the replacement ratios for ironmaking and steelmaking capacity were raised from the 2021 version's ratio of no less than 1.5:1 in key air pollution prevention and control regions and no less than 1.25:1 in other regions, to a unified ratio of no less than 1.5:1 for ironmaking and steelmaking capacity replacement nationwide;
The replacement ratio for mergers and reorganizations was raised from the 2021 version's ratio of no less than 1.25:1 in key air pollution prevention and control regions and no less than 1.1:1 in other regions, to a unified ratio of no less than 1.25:1 for ironmaking and steelmaking capacity replacement nationwide, once again highlighting the overall policy direction of encouraging enterprise mergers and reorganizations and green, low-carbon development.
In addition, SMM believes that the new regulation no longer applies differentiated controls to different regions, with the replacement ratio in non-key regions raised to a unified national level. This means that for every 1 mt of new capacity built, 1.5 mt of old capacity will be retired, controlling the industry's total capacity from the source and ensuring a sustained decline in capacity. Moreover, this can also effectively curb the disorderly expansion of steel capacity in non-key control regions and promote continuous optimization of industry capacity.

(Data in this report, other than publicly available information, is derived from public information (including but not limited to industry news, seminars, exhibitions, corporate financial reports, brokerage reports, NBS data, customs import and export data, various data published by major associations and institutions, etc.), market communication, and SMM's internal database models, through comprehensive analysis and reasonable inference by the research team. It is for reference only and does not constitute decision-making advice.

SMM reserves the right of final interpretation of the terms of this disclaimer and retains the right to adjust and modify the content of this disclaimer based on actual circumstances.