Steel companies integrate new production capacity into the market

The steel industry has recently seen a major policy shift as the State Council released the "Guidance Opinion on Resolving Severe Overcapacity," adopting a strategy of "unblocking and combining." This approach involves reducing 80 million tons of steel production capacity while simultaneously boosting domestic demand to absorb excess supply. The move is aimed at addressing long-standing issues of overcapacity that have plagued the sector for years. Since 2005, China's steel production capacity has surged from 500 million tons to over one billion tons, leading to operational challenges across the industry. Industry experts highlight three key innovations in this new guidance: enhanced regulatory constraints, stronger environmental standards, and a reduced role for local governments in promoting overcapacity. First, the policy now carries more weight, issued directly by the State Council rather than individual ministries, signaling a stronger central authority. Second, it emphasizes stricter energy efficiency and environmental regulations, including mandatory energy consumption quotas and differentiated pricing policies to encourage sustainable practices. Third, local governments are now held accountable for their role in driving unnecessary capacity expansion through incentives like cheap land, which often led to repeated investments. According to CICC, the State Council’s document represents a market-oriented and region-specific approach. It is expected that after 2015, domestic steel production will no longer see a net increase, with profitability gradually improving after 2016. The Bohai Rim region, home to the largest concentration of Chinese steel mills, is expected to be a primary target for capacity reduction. If effective measures are implemented, this could help steel companies outside the region regain profitability. Companies such as Fangda Special Steel and Sansteel Shuguang are likely to benefit from these changes. In addition to cutting capacity, the guidance also encourages expanding the domestic steel structure market. By promoting the use of steel structures in public and government projects, the policy aims to tap into a large untapped potential. In countries like the U.S. and Japan, steel construction accounts for over 40% of total building area, compared to less than 5% in China. This gap presents significant growth opportunities. Experts believe that as steel structures become more widely adopted—especially in high-rise buildings and infrastructure projects—companies like Seiko Steel and Honglu Steel stand to gain substantial benefits. With continued policy support, the future of China’s steel industry looks more promising, balancing both reduction and development strategies.

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