This document is one of a type the Government releases from time to time in order to restate or extend a policy position, and publicly set expectations for the broad policy framework it expects industry to operate within. Therefore, it is different from policy documents which are more explicit on stricter implementation criteria, such as the winter heating season cutback policy.
The Guide also reiterates the Government’s determination that the domestic steel industry is to focus on quality over quantity, which means that the industry should prioritise value-added steel production while keeping any new ironmaking and steelmaking capacity additions under control. The 200-page document includes recommendations detailed at a provincial level to maximise geographical advantages. For the steel industry, it therefore sets out product-wise provincial principles and draws a blue print which focuses heavy-end production away from environmental sensitive areas like Beijing, Tianjin and Hebei, to geographically advantageous regions as a very important step in overall industry transformation.
It is important to know that The Guide does not change any existing policy measures but serves to reinforce or augment them. An example is capacity elimination policy and the capacity swap within that which we previously analysed. Moreover, The Guide extends further with instructions and suggestions at provincial level to facilitate existing capacity elimination and capacity swap policy implementation.
Quality over quantity - The Guide in brief
In summary, The Guide sets forth China’s broad approach to industrial development strategy by setting national guidelines and regional targets while sticking to the principle of efficient market resource allocation with government instructions. Specifically, the document reiterates the focus on quality over quantity in the steel sector, which means that domestic steel should prioritise value-added and high-quality production while keeping any new ironmaking and steelmaking capacity additions in strict control.
The Guide states that domestic steel industry should “accelerate outdated steel capacity elimination and industry consolidation, increase high-quality steel production and improve greener technology implementation.” In addition, each part of the whole supply chain will be optimised to facilitate achieve this goal, from raw materials mining and beneficiation, to ironmaking and steelmaking, then to downstream manufacturing industries. For example, provinces containing natural resources, such as in Inner Mongolia, will prioritise coal and ore mining, while industry-intensive regions, like northeast China, will continue to focus on high-end equipment and machinery manufacturing. Meanwhile, new capacity additions will be highly restricted to make sure optimisation will not be negated by blind expansion which may jeopardise previous achievements, for example capacity eliminations.
Quantity is no longer a solution
The Chinese steel industry was once defined by capacity expansion. Supported by the years of rapid economic growth, steel mills sprung up and lifted Chinese steel production from less than 100 Mt before 2000 to exceed a 900 Mt mark in 2014. However, this extensive development model was challenged by the Global Financial Crisis and became increasingly problematic with slowing economic growth, excessive capacity and structural imbalances.
The government recognised this issue, and so supply-side reform was introduced by President Xi, first to the Chinese steel industry, in late 2015. A slew of structural changes has seen with a specific focus on the supply side through various government reinforced policies. In prior analysis, we discussed some of these policies, for instance, on capacity elimination and capacity swap, which paved way for China’s overall reform policy on industry supply. These measures focus on casting out obsolete iron and steel capacity, shifting existing capacity away from heavy polluted regions and replacing outdated technology with greener ironmaking and steelmaking technology.
Against this background, The Guide restates the necessity of Xi’s supply-side reform, its continuation and supports his view by emphasising the role of markets in resource allocation and the importance of government guidance in accelerating this change.
Now let us look at some of the details in steel, taking a regional perspective:
Clearly, The Guide is trying to reiterate the capacity policy position, and then emphasise the expectations for the framework it expects the industry to operate within, in order to achieve its overall supply-side reform strategy towards an optimised industry in the long run. For example, steel capacity in central and eastern China is excessive, therefore The Guide reiterates that relocation of capacity here to less steel-intensive regions but with increasing demand (i.e. western provinces), is a crucial step to achieve an overall national industrial health.
Quality will be the next focus
Meanwhile, the steel production portfolio will also need to be upgraded to fulfil the objective of producing higher-end and higher-quality steel grades. This is because in the long run, the makeup of China’s steel demand is also facing a structural shift from commercial-grade steels consumed in traditional industries towards higher-end and better-quality steel in advanced equipment and machinery manufacturing and in high-technology industries. This would suggest more government incentives towards value-added steel production, with the help of an upgrade in technology innovations.
Geographical advantages introduced
After understanding the regional themes and some related details of The Guide, we can sense that the policy has taken the regional geographical advantages into account.
On the supply side, The Guide suggests that some provinces are no longer allowed any new additions in ironmaking, steelmaking and/or ferroalloy capacity. These provinces are highlighted in the below map.
What’s new? The Guide has some new information. This includes detailed provincial capacity expansion restrictions which were not mentioned in the capacity swap policy. However, the it also provides further guidelines to ensure successful implementation of the capacity swap policy. The government’s intention on capacity swap is to restrict output in regions that are already excessive in steel, (i.e. in north China) in favour of regions that are short in steel supply but have better demand prospects. Steel mills in restricted regions are mostly being swapped, either with greener BOF or EAF capacities in the same region, or with other regions. An example of this change is Hebei local mills swapping capacity with EAFs in western Gansu and coastal Guangxi (red arrows in the map), where existing ironmaking and steelmaking capacity is limited. Moreover, these regions are often featured either with much cheaper power tariffs (western provinces), or with closer proximity to imported raw materials (coastal regions).
On the demand side, suggestions are also provided based on different regional demand prospects, highlighted in the below map.
In general, specific recommendations are provided to better meet regional demand prospects, following the rules summarised below:
- A general focus on high-value steel production, except for regions with specific reasons. For instance, ferroalloy production at Zangqing Industrial Park of Tibet, is being welcomed to meet local demand. With cheaper electricity, ferroalloy production will also reduce the regional dependence on ferroalloys from Qinghai and Gansu.
- A general focus on maximising regional advantages. Therefore, regions are being asked to specialise in what they have been good at. For example, provinces in northeast China will continue to focus on high-strength long products production while coastal provinces in south China will focus on sheet production used in automotive, home appliance and shipbuilding sectors.
- Regions such as Beijing, Tianjin and Hebei, will not undertake any ironmaking, steelmaking or ferroalloy production due to environmental concerns.
Guide reiterates value-added steel production focus
The main purpose of the Industry Transformation Guide is to restate and extend the Central Government’s position on industry transformation, and publicly set expectations and suggestions for this policy to operate within. The Guide does not change any existing policy measures but to reinforce or augment them. It is different from policy documents which are more explicit and reference to stricter implementation criteria.
In relation to steel, The Guide reiterates the Government’s determination to focus on quality over quantity, which means that the industry should prioritise value-added steel production while keeping any new ironmaking and steelmaking capacity additions under control. It extends existing policy further with instructions at provincial level to maximise geographical advantages.Explore this topic with CRU