Downsizing China's low grade steel capacity: not an easy task

Recently, more measures have been issued by China's related departments to further wash out low grade steel capacity. This strategy has been published in state policies on steel industry last year and repeated by officials in many occasions. However, the result is obscure so far. The latest measures that aim at all kinds of steel projects that disobey laws or state steel policies mainly can be summarized as the follows: Licenses and permits: State land department will not accept applications for land uses; environmental protection department will not accept environmental evaluation; commerce department will not approve constitutions and contracts; products' quality department either will not issue qualification certificates or withdraw issued ones; business and tax departments both will not register the involved companies. Capital: All financial institutes are prohibited to provide loans for such steel mills; securities supervising committee forbids the involved companies to finance from either local or overseas stock markets. Charges: Customs will not reduce customs duties and value-added taxes of imported devices; water and electric power supply departments will increase water and electricity price respectively. Although central government has made great efforts, just as some government officials openly stated, it is still difficult to reach the goal of cutting surplus steel capacity. Here are main causes: Firstly, local governments have been actively promoting consolidations among small mills. Steel mills contribute a lot to local tax income. A mill with yearly output of 1 million tons will bring local government at least RMB100 million ($12.5 million) every year. Consolidation is a good way to avoid the local small mills being closed down. The result is that new mill becomes stronger with higher capacity. In fact, in Hebei and Shanxi- two big steel provinces, many small mills have been consolidated. Secondly, medium and small size mills have been investing more to update devices and increase capacity. To avoid being forced to close, these mills tried hard to meet state's strict requirements. Among these requirements, the core factors are just devices and capacity. For example, state requires closing the blast furnaces with 300 cubic meters or less, and closing the converters with or less 20 tons. Mills will automatically invest more on equipment to meet these criteria. In recent years, many medium and small mills have gained huge amount of money. It is easy for them to invest several hundreds of million RMB to buy new equipment. Thirdly, employment problems will bring troubles. Employment is the first important mission of government in China. How to arrange the unemployed workers, if local small mills are closed in future, is not yet clear. Particularly in non-developed areas, there are not enough employment chances for local people. To avoid this problem, the best way for government is to arrange a big mill to merge the small ones. Workers positions will remain-but the surplus capacity will also remain. State's policies have been meeting strong challenges. At present, it is difficult to forecast the result.