FOCUS: China’s stricter steel capacity swap ratios to cool overheated raw materials markets

China’s new and stricter steel capacity swap ratios will cool the overheated steelmaking raw materials market and pave the way for more electric-arc furnaces to be used in its mammoth steel industry, market sources told Fastmarkets this week.

The country’s Ministry of Industry and Information Technology (MIIT) updated regulations for steelmaking capacity swaps on Thursday May 6 to firmly reduce steel production and ban new capacity from June 1.

Tighter ratios, wider region
In a government document issued in 2017, the Beijing-Tianjin-Hebei region, Yangtze River Delta and Pearl River Delta in southern China were listed as environmentally sensitive areas because of the heavy pollution generated by the industries located there.

In the document, mills in these regions were required to relocate or upgrade their capacity from city center to suburb or special industrial parks based on a ratio of 1.25:1. For instance, this means that a mill with 1.25 million tonnes per year of existing capacity must shut down its old facilities before starting production at its 1-million-tpy replacement capacity elsewhere.

In the latest document issued by the MIIT on Thursday, the Chinese government added another 40 cities in northern and eastern China to the list of environmentally sensitive areas.

The government also tightened the capacity swap ratio for such areas to 1.5:1 from June 1.

This means steel mills must shut down more of their old and low-quality capacity in exchange for lower but higher-quality replacement steelmaking capacity.

From June 1, the 1.25:1 capacity swap ratio will also apply to other areas across China that do not fall under the environmentally sensitive category. Previously, there was no unified ratio or guidance for these areas.

“Outdated steel capacity [with low technology and which produces high emissions] has been reduced by a lot since 2017, but the swap ratio stipulated in the 2017 government document was a bit low. As such, it was hard to limit the overall steel output increase so we had to revise it,” MIIT said

More specifically, to ensure that no new capacity emerges during the relocation process, steel mills must shut down their old facilities and stop production before commencing their replacement capacity. Chinese authorities will conduct regular inspections of the relocation process.

“Cities or provinces that had failed to meet their steel capacity limits imposed previously are not allowed to accept the capacity swaps from other regions,” the document said.

Toward cleaner steelmaking
China aims to have its carbon dioxide emissions peak by 2030 and achieve carbon neutrality by 2060. Its steel sector, which predominantly consists of blast furnaces (BFs), will play a major role toward achieving these targets.

On May 1, China removed its import tariffs for pig iron, crude steel, ferro-chrome and ferrous scrap – which the Chinese government refers to as recycled steel raw materials – to further reduce its domestic crude steel production and energy consumption.

The amended steel capacity swaps regulation also encourages the development of steelmaking using electric-arc furnaces (EAFs), which involves the consumption of steel scrap, and new clean technology for steel production that does not involve BFs. The capacity swap ratio for EAF to EAF steelmaking, as well as BF to EAF or other hydrogen metallurgy steelmaking facilities, is 1:1.

“The government has been encouraging EAF or low-carbon steelmaking at many meetings. This time, its guidance has become clearer,” a market source said.

Upstream impact
An industry analyst in Beijing said the ban on new capacity and the cap on production would support steel product prices and steelmaking margins, and gradually the market for steelmaking raw materials such as iron ore and coking coal in the long run.

“There may be some impact in the long term, but the short-term outlook is prices [for steelmaking raw materials] will most likely stay bullish because steel mills are still showing stronger demand for high-quality materials,” a Shanghai-based analyst said.

A few market sources said that steelmakers in northern China had been consuming more high-grade steelmaking raw materials and steel scrap through the use of improved technology to maintain their production rates without breaching curbs on sintering and other BF processes.

“With strict restrictions in place, mills are forced to consume high-grade iron ore to produce higher-quality steel,” a Singapore-based iron ore trader said.

A trader in northern China also pointed out that the elevated prices for iron ore and coking coal were the result of the healthy steel margins that steelmakers had been enjoying in recent months.

Prices for iron ore rose to new highs this week after a five-day Labor Day break in China amid strong demand among mid-sized and large Chinese steel mills.

Fastmarkets’ index for 62% Fe fines, cfr Qingdao was at $201.88 per tonne on Thursday May 6, the first time that it has ever exceeded $200 per tonne since the launch of the index in 2008.

Several market participants said the impact of the new steel capacity swap policy on the coking coal market has not been very apparent so far. This is due to tight supply in both the domestic and seaborne high-quality coking coal market and the prevailing restocking demand, which may continue at least for the short term.

“Large steelmakers need to secure enough raw materials amid the current supply tightness to sustain their higher production rates. Their healthy profits allow them to afford high-quality North American coking coal cargoes,” a Tangshan-based trader said.

Fastmarkets’ index for premium hard coking coal, cfr Jingtang was at $229.05 per tonne on Thursday May 6, its highest since March 2018.

Join our industry experts for an exciting forward look into Asia’s evolving steel market at the Singapore Steel Forum on July 14. Register today at https://events.fastmarkets.com/singapore-steel-forum

Alex Theo in Singapore and Min Li in Shanghai contributed to this report.

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