[SMM Hot Topic] New Opportunities for Steel Amidst the "Rat Race" Competition

Comprehensive Overview

The steel industry's anti-"rat race" competition and coal's strong rebound ignited the ferrous metals market in July. Can the 2025 anti-"rat race" initiative replicate the industry's price and profit trends seen during the previous supply-side reform? SMM believes it will be quite challenging...

First, during the supply-side reform period, the exit of induction furnace capacity and the simultaneous promotion of shantytown renovation monetization fundamentally reshaped China's steel fundamentals from both supply and demand sides. In 2025, however, the insufficient outdated capacity to be phased out and the lack of downstream consumption engines make it difficult to replicate the rebound trend of the 2015 supply-side reform.

The ferrous metals series may enter a phase of considerable fluctuation. In the short term, focus will return to fundamentals after macro policy meetings. This price rally has driven significantly greater gains for high-grade ore compared to medium- and low-grade ores. Reduced new mill maintenance and profit-driven mill load increases during the off-season may create supply pressure in August-September. Demand side, finished product destocking is a key factor supporting this upward movement, but SMM surveys show downstream consumption has entered the off-season with clear MoM weakening trends. Continuously declining export orders in recent weeks and new order verification checks will negatively impact August-September shipments.

With weakening macro influences and gradually emerging fundamental pressures, SMM expects steel prices to pull back in August-September. Iron ore will maintain a loose supply trend in H2, with prices likely facing synchronous pressure. Coal prices may show relative strength if capacity policies materialize.

Year-end, production restriction trading may dominate, with attention on whether mills' output exceeds last year's levels. The rebar-iron ore ratio could widen. Monitor rebar's price range at 3,150-3,450 yuan/mt and iron ore at $85-100/mt.

From "Capacity Reduction" to "Anti-'Rat Race'": Policy Cycles and Breakthroughs in the Steel Industry

One Year After the Anti-"Rat Race" Proposal: Key Policy Events

Since July 2024, political "rat race" competition has been repeatedly mentioned at the central level, with wording shifting from "prevention" to "comprehensive rectification." On its first anniversary, policy intensity against "rat race" competition has significantly increased.

Steel Industry Supply-Side Reform Policy Review

From 2015 onward, the steel industry successively introducedovercapacity resolution, capacity replacement implementation measures, ultra-low emission upgrades, carbon neutrality targets, inclusion in the national carbon market, and energy-saving carbon reduction actionsas part of supply-side policies to achieve quality development.

2015 vs. 2025: How Do Supply-Side Reform and Anti-"Rat Race" Contexts Differ?

Both 2015 and 2025 saw the steel industry facing low profits and surging exports. However, differences exist in capacity utilization rates, downstream demand curves, industry concentration, absolute price lows, and capacity structures.

Data Representation: 2015 vs. 2024 Markets

Data sources: NBS, General Administration of Customs, SMM, CISA

China's Steel Overcapacity Contradictions Peaked Around 2015 and 2025

The 2015 supply-side reform and 2021 crude steel production reduction policy effectively drove YoY crude steel output declines. In 2024-2025, China's steel supply-demand gap again exceeded 10%.

Data sources: NBS, General Administration of Customs, SMM.

China's Crude Steel Consumption = Crude Steel Production - Net Steel Imports - Net Billet Imports

Passive Release of Excess Capacity - Steel Exports Re-enter 100-Million-mt Market

2015 and 2025 export markets show strong consistency, with low-price, low-quality exports and anti-dumping investigations proliferating simultaneously. Overseas acceptance remains insufficient, making sustained passive supply-demand adjustments difficult.

Data sources: General Administration of Customs, SMM

SMM Analysis:

In 2015, China exported 112.4 million mt of steel products, hitting a record high (up 19.9% YoY) at an average price of 3,461 yuan/mt (down 25.4% YoY). Declining apparent crude steel consumption and capacity utilization forced companies to rely on low-price exports for survival. With low trade barriers, China faced 37 anti-dumping cases that year.

In H1 2025, China exported 5.8147 million mt of steel products, up 9.2% YoY from 2024's high base. Anti-dumping cases in 2024 exceeded the total of the previous four years. High exports still reflect domestic sales inadequacy, making "going global" a consensus survival strategy for most firms.

Low-End Capacity Structure & Low Industry Concentration

In 2015, steel industry concentration (CR10) fell to 34%. Through supply-side reform and mergers, 2024 CR10 rebounded to 43%. With induction furnaces completely banned, China's 2025 steel capacity structure appears more "rational."

Data sources: WSA, SMM

Compared with the previous supply-side reform, 2025 steel prices and profits are relatively better

In 2015, average industry profit per mt of steel dropped to -106 yuan. Supported by product structure upgrades, current trough profits outperform 2015 levels.

Data sources: CISA, SMM

The Previous Steel Price & Profit Upturn Benefited from Domestic Capacity Reduction & Demand Growth

In 2015, supported by capacity reduction and shantytown monetization, steel industry fundamentals saw decisive reversal, ushering in a golden cycle for prices and profits.

Data sources: NBS, SMM

SMM Analysis:

2015 marked a critical turning point for China's steel industry: supply-side structural reforms addressed overcapacity while shantytown monetization activated construction steel demand, forming a "dual supply-demand adjustment" stimulus package that profoundly reshaped industry dynamics.

In 2025, however, prolonged property market weakness has altered steel demand structures. Although infrastructure investment and industrial steel demand grow, they cannot offset real estate declines, making demand resonance unlikely.

Potential Anti-"Rat Race" Pathways and Implementation Feasibility in Steel Industry

Path 1: Eliminate Outdated Capacity—Implementation Conditions Lacking

Post previous supply-side reforms, China's steel capacity has been upgraded. Recent policies only target sub-1,000m³ capacity, with remaining capacity no longer considered "outdated."

Data sources: SMM, CISA

Path 2: Ultra-Low Emission Upgrades & Environmental Ratings—Limited Impact

CISA estimates 80% of China's capacity will complete (or partially complete) ultra-low emission upgrades by 2025, with full completion expected by 2026.

Data sources: Hebei Environment Department, SMM, CISA

SMM Analysis:

By H1 2025, China had nearly 400 steel mills, over half having completed/partially completed ultra-low emission upgrades. Hebei province has achieved full "Grade A" environmental performance ratings for operating mills, significantly reducing production constraints. However, average environmental operating costs of 228.94 yuan/mt may pressure profits and prices if sustained long-term.

Path 3: Include Steel Industry in National Carbon Market for Production Control via Carbon Allowances

Carbon allowance-based production control transforms "environmental costs" into "transition drivers," forcing technological upgrades and green transformation while restricting outdated capacity and stimulating high-quality development.

Data sources: SMM

On July 21, the national carbon market's composite price stood at 73.12 yuan/mt. Including steel in the carbon market for production control serves as a "market lever" for high-quality development and capacity optimization. This approach uses carbon costs to phase out outdated capacity, promote low-carbon technologies, upgrade product structures, and increase concentration—a 3-5 year transition yielding sustainable competitiveness.

Path 4: Increase Steel Industry Concentration to Holistically Regulate Output and Operating Rates

Since 2019, China's steel capacity utilization has far exceeded U.S. and Japanese levels, yet high output hasn't translated to profits.

Data sources: WSA, SMM

Path 5: Reduce Low-End Billet Exports While Transitioning to Global Expansion

China's crude steel output peaked in 2020 before declining. With property market and population peaks passed, steel production is expected to plateau or decline.

Data sources: WSA

New Opportunities in Steel Industry

Steel Opportunities Under Anti-"Rat Race"

Under anti-"rat race," leading steel companies may benefit long-term. Commodity-wise, ferrous prices will continue fluctuating with supply-demand patterns, while global market balance will increasingly influence Chinese steel prices medium-to-long term.

H1 "data-based control" achieved, with mills showing little short-term willingness for active production cuts.

Short-term, coal leads ferrous gains with destocking supporting upside. Medium-term, weak overseas consumption may struggle to sustain high prices.

Data sources: NBS, SMM

Declining Steel Export Orders Threaten September Shipments

Short-term domestic ferrous surges contrast with stable/falling overseas steel prices, creating wait-and-see sentiment among traders. Exporters face order-taking difficulties, with clear September shipment slowdowns.

Data sources: NBS, SMM

Coal's Potential May Outshine Steel Under Anti-"Rat Race"

Short-term, coal leads ferrous gains with destocking supporting upside. Medium-term, weak overseas consumption may struggle to sustain high prices. Monitor the most-traded rebar contract at 3,150-3,450 points.

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