China, the world’s largest steel producer, has announced a temporary suspension of its steel capacity replacement programme effective from August 23. This decision, made by the Ministry of Industry and Information Technology, aims to revise the existing measures that require steel mills to dismantle an equal amount of older capacity when introducing new capacity. The goal of this programme has been to counteract overcapacity in the steel industry.
The suspension is anticipated to limit the overall expansion of steel capacity in the long term. The ministry will collaborate with relevant stakeholders to study and modify the current swap measures, although no specific timeline for the release of revised regulations has been provided.
This is not the first time the capacity swap programme has faced disruption; it was previously suspended in January 2020 before new regulations took effect in June 2021. The ministry cited “new challenges” facing the steel industry as the reason for the current halt. The sector has been grappling with overcapacity, exacerbated by declining demand linked to a prolonged property crisis in China.
Despite a reduction in steel supply since 2021—when the country began capping crude steel output to limit carbon emissions—the sector continues to struggle with excess capacity. Analysts from Horizon Insights noted that while the suspension will curb capacity expansion in the medium to long term, ongoing projects under construction may not be significantly affected in the short term.
Analysts at First Futures suggested that the halt could accelerate the elimination of “zombie” capacity during an industrial downturn, and they expect the revised standards to be more stringent. However, Citi analysts expressed skepticism, arguing that the current measures may not sufficiently address the need to phase out excess capacity, especially given the weakening demand.