On July 24, China’s National Development & Reform Commission (NDRC), the State Administration for Market Regulation and other government departments jointly issued a draft revision of the Implementation Regulations of the Price Law for public comment, which explicitly proposes “governing low-price disorderly competition among enterprises in accordance with the law and promoting the orderly withdrawal of backward production capacity,” marking the official end of the era of “low-price competition” in the steel industry, also signaling the entry of a new round of supply-side structural reforms into a new phase of legalization and standardization.
The draft focuses on improving three core factors.
First, it clarifies the criteria for determining low-price dumping: for instance, putting “long-term sales below cost (determined based on the industry average full cost, plus reasonable profit)” in the scope of legal prohibitions, and refining the rules for calculating “cost composition” (including implicit costs such as environmental protection and research and development investment) to plug loopholes that allow companies to engage in vicious competition by cutting necessary costs.
Secondly, it newly strengthens enforcement of low-price regulations: for example, prohibiting enterprises with market dominance from forcing upstream and downstream operators to accept prices below cost through means such as “price fixing” and “bundled sales” and preventing large enterprises from using their dominant position to squeeze out small and medium-sized enterprises.
Thirdly, it strengthens penalties for violations: for instance, companies that violate regulations based on their illegal gains will be fined, in serious cases their business licenses will be revoked, and their violations will be included in the credit system to restrict their participation in government procurement, financing, and other activities.
This is the first time that China has formulated specific competition rules under the framework of the Price Law, significantly enhancing the rigidity of the law and its industry-specific nature. The policy will not only target explicit low prices, but also aim at implicit internal competition, which will use legal means to promote the industry's transition from price competition to value competition.
Market analysts expect that the strict capacity control by the government and steelmakers’ self-imposed production cuts will jointly promote the continued contraction of supply in the steel industry, effectively resolving structural contradictions in the industry and achieving fundamental improvements. It is thought that steel prices in China will move up in the coming month.
But at the same time, as last week the market was driven by a cost push, in the short-term spot steel prices will depend highly on the situation in the raw material segments, such as coking coal and coke, in China. In particular, today, July 28, steel prices have retreated, following a significant drop in coking coal futures prices after too sharp a rise last week.