Analysis of Production Capacity in China's Iron and Steel Industry

At present, the global steel industry has a production capacity of more than 2 billion tons, of which China's production capacity exceeds 1 billion tons, which accounts for 50% of the global production capacity. According to the data of the World Steel Association, the global crude steel production in 2012 was about 1.5 billion tons, according to which, The global steel industry has an excess production capacity of about 500 million tons. The overcapacity in the steel industry is a global phenomenon.

More than 200 million tons of excess capacity in the steel industry exceeds 200 million tons in China. Overcapacity, especially overcapacity in the iron and steel industry, is a common problem in China. In the past five years, the capacity utilization rate of the steel industry in China has been fluctuating around 75%. In 2012, the capacity utilization rate was as low as 72%, and the overcapacity situation was serious. China Steel Association estimates that China's crude steel production capacity will exceed 1.0 billion tons this year to 1.02 billion tons (2012 production capacity of 990 million tons), and China's crude steel production this year is expected to reach 780 million tons (equivalent to 76% of capacity utilization rate). Based on this calculation, it is conservatively estimated that the excess capacity of the steel industry in China exceeds 200 million tons, the global excess capacity of 500 million tons of steel has exceeded 200 million tons in China, and China’s excess production capacity accounts for 40% of the world’s total.

In August of this year, the country’s crude steel production reached 65.02 million tons. According to the annual production of 1.02 billion tons of production capacity, it is equivalent to about 76.5% of capacity utilization, and from January to August, the cumulative output of crude steel was 502 million tons, equivalent to about 73.8% of capacity utilization rate. Due to differences in statistical standards, the statistics from the National Bureau of Statistics show that China's crude steel production from January to August totaled 522 million tons, and the capacity utilization rate was about 76.74%.

To solve the excess capacity is nothing more than two ways, one is the addition of demand side: new demand to digest excess production capacity, otherwise it can only do a subtraction on the supply side, eliminate backward production capacity, limit supply so that capacity utilization into a reasonable range. Demand-side addition is not practical. As mentioned above, the overcapacity in China's steel industry is huge, with 200 million tons of excess capacity accounting for 40% of the world's excess capacity, and accounting for about 13% of global production in 2012. The overcapacity in the steel industry is currently a global phenomenon. The global excess production capacity exceeds 500 million tons, which accounts for about 33% of the world's total production, which means that it is difficult to absorb excess production capacity through exports.

Looking at domestic demand again, first of all, at present, China’s economic growth hub is moving downwards. In terms of high probability, the future economic growth rate should fall within the range of 7%-8%; secondly: “expanding domestic demand and promotion fees” is already the current economic transformation in China. In a major direction, as the economic transformation advances, the proportion of investment in China’s total economic output will show a declining trend; the deceleration of economic growth and economic transformation will all have a negative impact on domestic steel demand growth.

From another perspective, from the history of the industrialization process of developed countries, developed countries have reached the peak of domestic steel consumption after the completion of industrialization (simple assuming production = sales), and the average steel consumption in developed countries is 0.612 tons per capita. If calculated according to this year's 780 million tons of crude steel production, China's average per capita consumption of crude steel is close to 0.6 tons, approaching the peak of steel consumption in developed countries, which we can also conclude that China's steel consumption is close to the saturation level. Therefore, it is also difficult for the domestic demand level to grow explosively to absorb 200 million tons of excess capacity in the short term.

The elimination of backward production capacity has been carried out step by step, and the elimination of backward production capacity during the "Eleventh Five-Year Plan" period has been completed. According to data from the Ministry of Industry and Information Technology, the elimination target for ironmaking capacity during the “Eleventh Five-Year Plan” is 100 million tons. By the end of 2010, 120 million tons of steel production capacity has been eliminated across the country; 50 million tons of steelmaking capacity has been eliminated during the “Eleventh Five-Year Plan” period. By 2010, 72 million tons have been completed in the country.

However, at the same time as the elimination of backward production capacity, new projects, new production capacity has continued to increase, resulting in the entire "Eleventh Five-Year" period, China's crude steel production capacity is manifested as a net increase, the situation of excess production capacity has further deteriorated. According to the National Bureau of Statistics, during the “Eleventh Five-Year Plan” period, the country’s pig iron production capacity has increased by 150 million tons, and the steelmaking production capacity has increased by 122 million tons. Therefore, it can be calculated that the net increase in China’s pig iron production capacity during the “Eleventh Five-Year Plan” period is about 30 million tons. However, the crude steel production capacity has increased by 50 million tons.

While eliminating backward production capacity and at the same time opening up new projects with sufficient horsepower, investment in new production capacity has caused the problem of overcapacity in the steel industry to deteriorate step by step. This has been a major problem in China's steel industry, according to Chi Jingdong, chief analyst of China Steel Association. It pointed out that from 2006 to 2012, China's steel industry eliminated a total of 63 million tons of backward production capacity, but in the same period, the new production capacity has reached a staggering 440 million tons.

On December 31, 2011, the Ministry of Industry and Information Technology released the target task of eliminating backward production capacity in 19 key industries in the industrial sector during the “Twelfth Five-Year Plan” period, in which the backward production capacity of iron and steel making and steelmaking was set at 48 million tons.

The Ministry of Industry and Information Technology publishes an annual out-put target for elimination of production capacity. In April 2011, the Ministry of Industry and Information Technology announced the 2011 target to show that 11-year plan to phase out 26.3 million tons of pig iron production capacity and 26.27 million tons of steelmaking; in April 2012, the Ministry of Industry and Information Technology announced that it will involve 19 in 2012. The industrial industry has eliminated the backward production capacity target, including 10 million tons of iron-smelting and 7.8 million tons of steelmaking. The target announced in April this year shows that the planned phase-out of 2.62 million tons of pig iron production capacity and 7.78 million tons of steelmaking capacity will be planned during the year. The Ministry of Industry and Information Technology announced on July 25. During the year, the first backward production capacity enterprises eliminated the list, and the pig iron production capacity was 2.77 million tons, which was overweighted from the target at the beginning of the year. The designed crude steel production capacity was 6.98 million tons, which has not yet reached the target set at the beginning of the year.