Caixin
May 07, 2021 07:58 PM
BUSINESS & TECH

China’s Steelmakers Forced to Further Slim Down New Mills to Cut Emissions

Workers move stainless steel sheets in Jingjiang, East China's Jiangsu province, on April 15. Photo: VCG
Workers move stainless steel sheets in Jingjiang, East China's Jiangsu province, on April 15. Photo: VCG

Chinese steelmakers in areas with strict pollution controls must ensure that new mills have at least one-third less capacity than those they replace, under new government rules aimed at slimming down the notoriously bloated sector.

The regulations released Thursday by the Ministry of Industry and Information Technology tighten the rules around so-called “capacity swaps,” which previously required steel firms in those regions to cut the capacity of new factories to at least one-fifth less than those being retired.

The guidelines also include a ban on new or expanded steel smelting projects in the Yangtze Economic Zone, a sprawling region encompassing 11 provinces and four municipalities that is home to an estimated 40% of China’s population.

Strong downstream demand and improved efficiency have continued to drive an expansion of Chinese steel production despite years of efforts to curb overcapacity. Domestic crude steel output rose by nearly one-quarter between 2016 and 2019, and hit 1.05 billion tons last year, a 5.2% increase on 2019, according to data from the Ministry of Commerce (link in Chinese).

The country has suspended the construction of more than 200 million tons of new steel capacity since 2019 in order to curb the impact of excess supply on the market, said Zhang Longqiang, the head of the China Metallurgical Information and Standardization Institute.

Capacity swaps have been the only way to add new steelmaking capacity in China since 2017. The process requires manufacturers to show that their plans to add capacity must include the retirement of a comparatively greater amount of existing capacity.

According to the new regulations (link in Chinese), steelmakers outside pollution control zones now have to make sure that their new capacity is at least 20% less than that of the mills they plan to take offline. Such areas previously had no specific reduction requirements, making it difficult to curb capacity increases, the industry ministry said.

The rules make exceptions for firms adding capacity as part of mergers or restructuring, as well as for electric arc furnaces, which are typically used to forge special-quality steel. They will come into effect on June 1.

Thursday’s announcement had been brewing for some time. In December, the ministry floated a draft plan to tighten capacity swaps in an effort to prevent newly built plants from hindering the fight against overcapacity, which in turn followed an earlier directive encouraging local governments to investigate existing projects.

Zhang said the new measures aimed to bring the steel sector in line with China’s climate goals. The world’s largest greenhouse gas producer has vowed to cut carbon dioxide emissions during the next five years by slashing steel production and pushing for industry restructuring.

Top industry officials said last year that the hundreds of companies accounting for more than 600 million tons of crude steel production capacity were upgrading their operations to meet stricter emissions targets and transition to “ultra-low” emissions.

Overall, China has pledged to bring its carbon dioxide emissions to a peak by 2030 and to net zero by 2060 in a bid to mitigate the effects of global warming and climate change. Iron and steel directly account for 7% of global carbon emissions from the energy system, more than the emissions from all road freight, according to the International Energy Agency.

Lu Yutong contributed reporting.

Contact reporter Matthew Walsh (matthewwalsh@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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