Chinese steel firms call for state action to solve capacity glut

11 March 2015

China's struggling steel mills appealed for government intervention this week to ease a capacity glut that has depressed prices and seems unlikely to get any better this year.

Crude steel production capacity reached 1.16 billion tonnes in 2014, way higher than actual output of 822.7 million, an executive with one of the country's biggest producers told Reuters on the sidelines of a meeting of parliament.

"It is hard to see this year being any better than last year, and I actually think it will be worse," said Cao Huiquan, chairman of Hunan Valin Iron and Steel Group, a state-controlled mill that has ArcelorMittal among its strategic investors.

"Overcapacity is a macroeconomic policy issue and I believe it needs to be solved through law and industry standards. This is the best way, rather than interfering on a microeconomic level by shutting down projects," Cao said.

China has pushed through a series of measures aimed at forcing mergers and closing smaller polluting plants, but enforcement is weak and firms have resisted restructuring. Cao said it was likely that total capacity would continue to increase in 2015.

The industry ministry is expected to issue new guidelines this year that will further raise environmental standards in the sector and therefore costs, adding to the problems of smaller mills with razor-thin margins.

Cao said the crucial issue was creating a level playing field.

"What is needed is equal implementation and not selective implementation," he said, adding that in regions where enforcement was lax, mills could be paying as little as 20-30 yuan per tonne to comply with environmental rules, compared to 150 yuan elsewhere.

In a proposal submitted to parliament, Deng Qilin, the chairman of Wuhan Iron and Steel Group, China's fourth-biggest producer, said China should use the country's new environmental law to raise levels of compliance throughout the sector.

Valin's Cao said it was unclear whether there would be a new wave of closures this year, noting that local governments were doing their utmost to support mills in order to save jobs.

"Resolving these employment issues will need input from the government," he said.

Officials in Hebei province, China's biggest steel-producing region, also called for more state support during delegation meetings this week, with the governor saying the restructuring process had been far harder than expected.


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