BEIJING (Scrap Monster): The Chinese government authorities stated that the centrally administered state steel enterprises are well on track to achieve the annual capacity reduction goal set for 2016. Meantime, Chinese administration has initiated action against two steelmakers in Jiangsu and Hebei provinces for violating rules and regulations. The action reflects the government’s determination to tackle the overcapacity issue, analysts noted.

The Chinese government website noted that Jiangsu Huada Steel Co Ltd in the eastern province of Jiangsu and Hebei Anfeng Steel Co Ltd in northern Hebei province have violated regulations by launching new steel projects and illegally producing steel, thereby impacting the local industry. The administration has punished Hebei's vice governor Zhang Jiehui and Jiangsu's vice governor Ma Qiulin, holding them responsible for the violations in their provices. The authorities have also published the names of 111 and 27 people in Jiangsu and Hebei provinces respectively, in connection with the incident.

Meantime, Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute noted that the few punishments announced by the administration must serve well to be a warning to many others who tend to violate the rules. Those who violate rules must be severely punished, Li noted. Such actions would help to create fair market environment and provide big boost to the development of domestic steel industry in the country, he added. Incidentally, press release by the National Development and Reform Commission (NDRC) had stated that the domestic steelmakers have hit the target of reducing steel output by 45 million tons for 2016, well ahead of the schedule.

The country has been slashing its steel capacity over the past several years. However, the efforts have gained considerable momentum during recent months. As per estimates, China has cut steel capacity of more than 90 million tonnes over the past five years. Also, by July this year, the country has already cut capacity by 13 million tonnes, nearly 47% of the planned production cut for the entire year. The Chinese administration plans to reduce steel output by additional 100 million to 150 million tonnes by 2020.

The supply side structural reforms by Chinese administration has witnessed tremendous progress since its introduction in 2015 and is most likely to remain as the central theme of the nation’s economic growth in 2017. The several measures proposed by the policy makers to resolve structural imbalances in the country has led to 6.7% expansion of the country’s economy during the initial three quarters of 2016, in line with the target of 6.5-7.0%.

Meantime, Hebei province, the primary producer of steel, has lifted the proposed steel capacity cutting targets for 2017. The economic work conference decided to raise the steel capacity cutting target from earlier 15.62 million tonnes to 19.86 million tonnes for the year. The administration, which had targeted zombie plants this year, is expected to target operational capacity in 2017. Stricter environmental rules and action against illegal small ticket producers may further aid the country to achieve scheduled capacity cuts in 2017.

The capacity cuts will augur well for the bigger and modern steel producers in the country, thereby leading to consolidation within the highly fragmented industry. The cuts could also result in increased utilization rate by mills.