Oversupply concerns pose hefty problems for steel manufacturers

Oversupply concerns weigh heavily on the steel sector in China as some 80 million metric tons of fresh capacity will hit the market this year amid dwindling demand due to the COVID-19 epidemic, an industry expert said.

Li Xinchuang, chief engineer of China Metallurgical Industry Planning and Research Institute, an industry research and consultancy platform under the State-owned Assets Supervision and Administration Commission of the State Council, said at a recent industry forum that the new capacity was primarily a result of the "capacity replacement" program that was outlined by the Ministry of Industry and Information Technology. The aim is to help steel companies shed outdated capacity and give permission to those companies for new capacity at certain levels.

According to data released by the National Development and Reform Commission, China produced 499 million tons of crude steel during the first six months of this year, up 1.4 percent on a yearly basis.

Li said crude steel production is likely to cross 1 billion tons this year in the country and steel production is likely to account for over 56 percent of the global output this year.

"New steel capacity released in a relatively short time will have a great impact on the market, especially as the COVID-19 epidemic crimped demand in both domestic and foreign markets. The steel industry is likely to witness a serious oversupply situation again," Li said.

According to Li, China's export of steel products dropped 16.5 percent year-on-year to 28.7 million tons as demand waned in overseas markets due to the epidemic. He said domestic steel consumption per unit of GDP is also likely to decline in the next few years as a result of the ongoing structural reforms.

"If steel companies' production exceeds market demand, destocking will be difficult to accomplish. High inventories may become the norm in the steel market this year. At the same time, high inventories will cause fund erosions and impact total turnover," Li said.

Lyu Guixin, an official with the Ministry of Industry and Information Technology, said during a recent industry forum that new guidelines for the "capacity replacement" program are in the pipeline.

According to a report by news website Jiemian, the Ministry of Industry and Information Technology has released a document on the new guidelines for the "capacity replacement" program to seek opinion from companies and organizations in the industry. Under the new guidelines, the ratio of outdated capacity against the new capacity has been increased to reduce risks of oversupply, according to the Jiemian report.

Raising the ratio of outdated capacity to the new capacity is meaningful for China's steel industry under the current situation, said Lyu.