With overcapacity a major issue for steelmakers worldwide and China very much in the spotlight as a key culprit, news that the Chinese government is offering steel producers incentives to cut production and reduce their environmental impact, can only be good news.

According to a report by China Metals, fiscal incentives are being used by the Chinese Government to reduce air pollution in Beijing, Tianjin and Hebei province and it looks as if market mechanisms will be used to resolve the country’s chronic over-capacity problems.

“China will relax policy controls and promote M&A [mergers and acquisitions] in the steel sector,” says China Metals, adding that the Government will also reduce constraints on foreign investment in the steel sector.

The Government has promised to cut capacity by 80Mt nationwide within five years, but with 90Mt of capacity currently under construction or under starter’s orders, industry observers would be forgiven for not taking China’s ambitions seriously.

China is producing more steel than it consumes and it is argued that the Chinese steel industry’s inefficiency is closely related to the issue of overcapacity.

Xiang Songzuo, chief economist with the Agricultural Bank of China, said that surplus capacity was destroying the wealth and resources of Chinese society and that the underlying cause was a lack of an open and integrated market based on orderly competition.

With regulations in place governing product quality, environmental protection, energy consumption and technological equipment, the Chinese Government rewards steel makers that conform to these regulations – those whose names appear on a special list – and restrict those not on the list. As a result, there are many steel makers in China in debt to the bank, profit margins are slim and the liability rate for the entire Chinese steel industry stands at 69.47%.

A second list of more than 45 approved steel makers is about to be released and some of China’s big name producers are (Baosteel, Wuhan Iron and Steel and Ansteel to name but three) on it. No steelmakers from China’s top steel making province, Hebei, were on the list.

Hebei province is in the process of dismantling blast furnaces in an effort to cut capacity. On 25 November, 10 blast furnaces and 16 revolving  furnaces were dismantled in eight steel mills in Tanshan, Handan and Chengde.

Source: China Metals.