China readies revamped steel capacity swap policy

China is to tighten its steel capacity swap programme by 20pc in high-growth areas by requiring a ratio of 1.5:1 between old and new production capacity.

The ministry of industry and information technology (MIIT) is taking public comments on a draft plan that will update implementation policies for the capacity swap programme that began in 2017.

The draft plan calls for stricter air pollution prevention in key steel-producing areas including the Beijing-Tianjin-Hebei region, the Yangtze river delta, the Pearl river delta, the Fen-Wei plain and other "2+26" regions. The other 2+26 regions and Fei-Wei plain are newly added areas to the implementation policy. Fei-Wei represents an estimated hot iron capacity of around 88mn t, or 8pc of China's total capacity, several market participants said.

The old-to-new swap ratio in these regions will tighten to 1.5:1 versus a previous 1.25:1 ratio. The swap ratio for small-scale capacity swaps in the rest of China will be 1.25:1. The ratio is looser for large mergers and acquisitions (M&A), remaining at 1.25:1 in these regions. For the rest of China the ratio loosens to 1.1:1 from a previous 1.25:1 for M&A capacity reductions, or 12pc less capacity reduction, a market analyst said.

The draft policy encourages new scrap-based electric arc furnace (EAF) capacity by allowing a 1:1 replacement ratio for EAFs that replace converter-based capacity with associated facilities including sinter plants, coke ovens and blast furnaces or outdated EAFs. It adds a requirement for third-party certification to verify compliance with the policy.

China's latest 2021-25 five-year economic planning period will boost scrap use in steel production. A draft MIIT roadmap calls for 30pc of steel output to come from scrap by 2025. China produced more than 1bn t of steel in 2020, using more than 200mn t of ferrous scrap.

There are doubts in the market about enforcement of the capacity swaps policy and whether the capacity reductions will translate into lower output. Some mills may have added capacity in violation of the rules, while others mills replaced old capacity with plants that have higher efficiency that offsets the shutdown facilities more than the comparable nameplate capacity.

"The policy cannot solve present problems of rising steel output and iron ore prices but it may fulfil the targets in the coming years," a Chinese mill manager said, adding that it is still a "beautiful" perspective anyway. China reduced its installed steel capacity by 150mn t as part of its 2016-20 five-year economic plan two years early in 2018.