Steel Capacity Continues to Grow Despite Surplus

SHANGHAI, Jul 18 (SMM) -- China's iron and steel capacity has been in surplus for years, but new capacity continues to come online whilst downstream demand remains sluggish. Chinese government has been eliminating outdated capacity strictly recent years, but the effect of outdated capacity elimination on steel supply and demand is skeptical as steel capacity has been growing since 2005. The obsolete capacity elimination target decreased 262.44% in 2012 compared to the 28.27 million mt/yr in 2011.

According to the NBS, fixed assets investment by domestic iron and steel industry (ferrous metal smelting and rolling industry) from January through June totaled RMB 228.1 billion, up 9.4% YoY, 11 percentage points lower than total domestic FAI growth. As such, the low return of investment in the iron and steel industry curbed investors interest significantly. On the other hand, there is news reported that Baosteel's project in Zhanjiang has been suspended. But Steelease believes despite capacity surplus and prices maintain downward track, capacity should continue to grow.

Capacities at private enterprises are hard to eliminate. SMEs were the largest contributor of steel output during 1H. With slowing GDP and slack demand for steel, steel plants were still aggressively releasing capacity to gain profit margins. As profit margins at most private enterprises are higher than SOEs, they are more efficient, so they will violate the market law if they exit the market or eliminate capacity.

On the other hand, capacities at SOEs are also hard to eliminate. SOEs belong to the country and are assets of Chinese government. Besides, SOEs have massive staffs and offer jobs to the society, and the responsibility to maintain the society steady. In addition, local governments were forced to loosen supervision to some obsolete or newly increased capacity so as to make achievement since China is in the face of slowing GDP growth and tax problems.