Market Insight: Paper market rebounds after China announces updated steel capacity replacement plans

China’s ferrous futures prices turned around to surge late in the afternoon on Monday, January 8 after the country’s officials declared stricter steel capacity replacement criteria to be implemented from this year.

The production facilities that will be allowed to have capacity replaced will only include those recorded in capacity replacement plans approved by local or central governments in 2016 and those that were constructed legally from 2016 onwards, according to a filing released by China’s Ministry of Industry and Information Technology (MIIT).

Production facilities that are part of overcapacity-cutting programmes, have enjoyed governmental allowances or been classified as producing substandard steel will not be allowed to replace capacity, the MIIT said.

Smelting facilities that have dismantled their main equipment before making a proper capacity replacement plan and those that are used in non-steel production such as casting will also not be eligible for capacity replacement, the MIIT added.

Meanwhile, the updated plan has further tightened the reduction-to-replacement requirement  ratio, the MIIT said.

The reduction-to-replacement ratio in environmentally-sensitive areas such as Beijing, Tianjin, Hebei, Yangtze River Delta and Pearl River Delta will continue to be no less than 1.25:1. In other regions, the reduction-to-replacement ratio will be adjusted no less than 1:1.

Moreover, the equivalent replacement will only be allowed when steelmakers replace basic oxygen furnace capacity with electric-arc furnace capacity, with a further requirement that the previous supporting facilities including sintering equipment, coke ovens, blast furnaces be removed as well.

Prices for ferrous futures jumped in late trading on Monday February 8 after the news was released.

The most-traded HRC contract prices jumped by 78 yuan per tonne during the last 30 minutes of trade, which erased the earlier loss of 28 yuan per tonne.

“The plan makes detailed requirements on steel capacity replacement, which may cause some replacement plans to be rejected by central or local governments,” Qiu Yuecheng, chief analyst at a Shanghai-based industry research institute Xiben New Line said.

“The plan will push up steel prices in both futures and spot markets for a while, but it is hard to estimate how long and how much steel prices will rise in the seasonally weak period,” he added.

Buyers in the spot market also increased procurement amid the rebound in the paper market, which prevented the spot prices from falling more deeply [during the day],” a trader in Shanghai said.