The Chinese government's push for a more environmentally friendly and self-sufficient steel industry faces significant hurdles to meeting proposed targets, starting with crude steel output cuts this year.
The ministry of industry and information technology (MIIT) released a draft five-year roadmap (see table) for public comment this month on the high-quality development of China's 1bn t/yr steel industry. It calls for more scrap use, expanded electric arc furnace (EAF) capacity and more Chinese ownership of iron ore supplies.
China's crude steel output should fall in 2021, a top MIIT official also said, as part of initial efforts to reduce carbon emissions.
The call for lower output was met with scepticism in the market, as wide steel profit margins, a surge in steel export demand and aggressive economic stimulus make it more likely that China will need to increase its steel output in 2021.
It also contradicts forecast growth by China's state-run think-tank the metallurgical industry planning and research institute. China's crude steel output is forecast to rise by 1.4pc to 1.065bn t in 2021 after a 5.4pc increase to 1.05bn t in 2020, the institute said last month. China's steel consumption rose by 9.6pc to 981mn t in 2020 and is forecast to rise by 1pc to 991mn t in 2021, it said.
MIIT's call for lower output in 2021 is aimed at taming soaring raw material prices, a north China mill official said. A voluntary request is unlikely to reverse the trend, not with new capacity coming on line and mills making strong profits, he said.
"Based on our rough estimation, there will be a net increase of over 40mn t/yr crude steel capacity in 2021" including more than 10mn t of EAF capacity, an east China steel trader said.
MIIT has also proposed tightening its steel capacity swap programme, but there is also scepticism that will reverse output gains.
MIIT's call for lower output is a signal to markets that iron ore demand should start to fall and "will be bearish for iron ore prices. It is not surprising that China calls for lower output because we know it is an inevitable trend", a Shanghai iron ore trader said. Short-term cuts could form production restrictions or the elimination of smaller mills after the Covid-19 pandemic is controlled, he said.
It is hard to see steel output cuts in 2021 with mills putting new blast furnaces in operation, but there could be other ways to make reductions like eliminating water-cooled rebar that is illegal but still circulating in east China steel markets, a Tangshan mill manager said.
There have been no specific measures announced to reduce output, but the carbon emissions trading scheme that launches 1 February could eventually drive increased scrap use at the expense of iron ore and coke as mills reduce carbon emissions, a Beijing iron ore trader said.
The main effect of MIIT's policies may be just to dampen sentiment, even if it does not lead to cuts, the inverse effect of Tangshan winter restrictions that were loosely enforced and did not lead to output cuts but still supported prices.
"The overall sentiment for the 2021 outlook has been dampened by the MIIT calls to reduce crude iron ore output, as the market is quite bullish about the steel demand next year ahead of the call," another Beijing iron ore trader said. "But now traders and mills should be more cautious and wary on what measures the government will carry out to reduce output, and to what extent it will be reduced. All these details have not been announced yet."
by China staff, Kitty Xie and Chris Newman
MIIT proposals for high-quality development of steel industry 2020-25
China's self-sufficiency for hot metal to exceed 45pc by increasing scrap output to 300mn t/yr and building overseas iron ore mines so that China-controlled mines account for over 20pc of import volumes.
EAF output to rise to 20pc share of total domestic crude steel output. All output from ferrous scrap including scrap charge in converters to rise to 30pc of total crude steel output.
Capacity ratio of advanced coke ovens to rise above 70pc. Advanced iron- and steel-producing capacity to rise above 80pc for each.
Steel industry to install ultra-low emissions controls on 80pc of capacity, with mills in key areas at a 100pc rate. Steel pollution emissions to fall by 20pc.
Market consolidation to forge several large-scale steel producers to ensure the five largest companies account for 40pc and 10 largest companies account for 60pc of total steel output.
Annual average industry labour productivity to reach 1,200t steel per capita. Newly built units to reach 2,000t per capita.
Strictly enforce steel capacity swaps and ban further expansion of steel capacity beyond the programme.