The steel industry in China is facing a complex and challenging situation, both internally and externally. While some production capacity must inevitably be phased out, traditional methods of notification and one-time shutdowns have proven to be inefficient and problematic. Can the concept of "regression" open up new possibilities for this sector?
**Three major pressures: market, environmental protection, and regulation — steel enterprises are entering their "coldest winter."**
Enterprises are either forced or choosing to exit production capacity. In Hebei Province, Puyang Iron and Steel Plant, a top enterprise in Handan, has seen its once-bustling wire production lines go silent for three months. “The price was bad, and we were losing money even when producing,†said a plant manager. Since November last year, wire production has been halted.
Since the early 2000s, China’s steel industry has struggled financially for four consecutive years. Demand remains weak, steel prices continue to fall, and raw material costs remain high. By January to October 2013, the profit per ton of steel for large and medium-sized enterprises was only 1.05 yuan. The strategy of cutting costs by reducing production has reached its limits. Some companies have proactively stopped operations under market pressure. Most of these shutdowns occur in low-value production lines like rebar, and among companies with poor internal management and cost control.
At the end of 2013, Hebei Tangshan and Sui organized mass shutdowns, dismantled equipment, and burned chimneys, forcibly removing outdated steel production capacity. Others on the elimination list faced high electricity tariffs, increasing operational costs and forcing them to stop production.
According to the State Council's plan to eliminate backward production capacity, China aims to cut 80 million tons of steel capacity over five years, with 60 million tons coming from Hebei, the country's largest steel province. In the same year, the government emphasized eliminating 15 million tons of ironmaking and 15 million tons of steelmaking in 2015. Regions that complete their targets will face stricter controls on new investment projects, with delays in approvals for key industry projects. In 2016 and 2017, the elimination policies will become more comprehensive and stringent.
In cities like Handan and Tangshan, some steel plants have shut down due to environmental violations. A 3-million-ton-per-year steel plant requires 500-600 million yuan for environmental equipment. With limited funds, tight bank loans, and strict environmental enforcement, many steel mills have no choice but to halt operations.
Song Jijun, vice president of the Hebei Metallurgical Industry Association, warned that under the triple pressure of the market, environmental regulations, and administrative controls, steel enterprises are experiencing their "coldest winter." Most are still managing to survive, but a small number have already shut down. If the current challenges persist, financial strains could lead to bankruptcy and widespread withdrawal.
According to the China Iron and Steel Association, from January to November 2013, member companies saw a profit of 16.18 billion yuan, compared to a loss of 756 million yuan in the same period in 2012. The sales profit margin was just 0.48%, the lowest among all industrial sectors. Although the industry as a whole turned a profit, individual steel companies still suffered losses of 27.9%.
**Steel production capacity contributes significantly to GDP and employment, making it hard to reverse. The exit mechanism should focus on constraints such as employment, finance, and taxation.**
Efforts to establish a steel production capacity withdrawal mechanism began as early as the 2009 steel revitalization plan. However, after years of implementation, the result has often been replacing old blast furnaces with new ones, rather than truly reducing capacity.
Li Xinchuang, dean of the China Metallurgical Planning Institute, explained that steel projects are capital and labor-intensive, contributing greatly to GDP and employment, but the cost of conversion is high. Local governments may prioritize short-term gains, while enterprises find it easy to enter but difficult to exit. As a result, steel capacity is "forward-moving and hard to turn back."
Personnel placement is a critical issue during the exit process. For example, Tangshan plans to reduce 40 million tons of steel capacity within five years, which could require over 100,000 people to be re-employed.
Debt risk is another major concern. The debt ratio of China Steel Association members is as high as 70%, with total loans reaching 1.3 trillion yuan. Many steel mills have mortgaged equipment to banks, and if these projects are eliminated, they could become bad assets. This poses a serious challenge for both enterprises and banks.
Economic development affordability is also a factor. The steel industry currently accounts for 2.4 times the added value of the second-largest industry, equipment manufacturing. For regions where steel is a pillar industry, capacity reduction without new industries to replace it can hurt economic growth and public investment.
Li Xinchuang believes that while significant differentiation has occurred in the steel industry, large-scale bankruptcies are unlikely in the short term, and systemic risks are minimal. However, localized issues may arise, making it urgent to establish a structured and fair capacity withdrawal mechanism.
Under the backdrop of economic transformation, the steel industry's exit cannot rely on outdated methods like “one paper notice, one customs.†The exit mechanism should focus on constraints like employment, finance, and taxation. The government must ensure basic living security, provide retraining and job guidance, and implement targeted re-employment policies. Support should also be given to enterprises that help re-employ laid-off workers, and incentives offered to entrepreneurs through credit, tax reductions, and labor support.
The central government should increase its support, provide financial aid for capacity exits, and assist regions with concentrated steel production. It must also address debt problems and local development issues of bankrupt enterprises.
Ultimately, the withdrawal of steel production capacity is not simply about "subtracting," but also about promoting transformation and upgrading, effectively doing "multiplication." The old administrative approach must not be repeated. Barriers of interest must be broken, and exit criteria should be based on environmental protection, energy consumption, and technology, rather than arbitrary one-size-fits-all measures.
This round of elimination has strong momentum, with the State Council issuing clear guidelines. Eliminating backward capacity helps resolve overcapacity and promote industrial upgrades — a positive step for large state-owned steel companies with advanced production and environmental standards. However, concerns remain among leaders of large state-owned enterprises about the fairness of the elimination process.
Some companies feel the "one size fits all" approach is being repeated. Lessons from past elimination efforts show that rigid quotas often unfairly target state-owned enterprises, pushing them to phase out low-end products while private firms quickly fill the gap.
Market lessons show that the old way won’t work. A scientific and rational elimination mechanism should set clear standards based on environmental, energy, and technological factors, rather than administrative orders. The core issue is to eliminate outdated capacity and improve the exit mechanism. The government must resist the temptation of GDP growth and strictly enforce environmental and energy standards.
As Li Xinchuang said, "If an enterprise meets environmental and energy consumption requirements, regardless of size, and can compete in the market, it is reasonable to allow it to stay."
Song Jijun emphasized that capacity exit should be the market’s survival of the fittest. Eventually, the industry will move toward a stronger market regulation mechanism, where only the most competitive enterprises survive, driving healthy development.
This elimination mechanism is already taking shape. Compared to previous rounds, environmental pressure has increased. Advanced enterprises with high environmental standards face little additional cost, while laggards with heavy environmental debts are hit hard, some forced to stop production.
Economic adjustments are also being introduced, such as higher electricity and water tariffs for companies on the elimination list, raising their production costs.
A more efficient exit mechanism will also help reduce the low concentration of China’s steel industry. Currently, China’s steel industry concentration is far lower than in Europe, America, and Japan, leading to slow technological and managerial progress. A more concentrated industry would enable better structural adjustment.
The consensus in the steel industry is that the withdrawal of production capacity is not just about “subtraction,†but also about promoting transformation and upgrading, achieving “multiplication.â€
We can already sense the industry’s vitality. “Most companies are fighting tooth and nail, competing in high-end steel quality, and in low-end steel, fighting cost control,†said Song Jijun. These two aspects are not just about remediation — they are the only path for enterprises to survive, develop, and transform the steel industry.
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