China’s Ministry of Industry and Information Technology (MIIT) issued a notice on Friday to suspend the replacement of steel production capacity. This means that the approval of all new ironmaking and steelmaking projects has been suspended, Kallanish notes.

China previously required all new projects to be approved through a capacity replacement process, which required the capacity of new equipment to be inherited from old equipment that would be dismantled. In most cases the total capacity must be reduced according to a specified ratio.

“It has effectively promoted the transformation and upgrading of the industry, structural adjustment, layout optimisation and mergers and reorganizations. But there are still problems such as inadequate policy implementation, imperfect supervision and implementation, and incompatibility with the development situation and needs of the industry,” the MIIT explains.

This is not the first time applications have been suspended. China issued the first version of the steel production capacity replacement process at the end of 2017 and suspended approvals on 30 January, 2020. After revisions, the second version of the policy was relaunched on 6 May, 2021, mainly increasing the preferential treatment for non-blast furnace ironmaking equipment and electric arc furnaces.

The latest suspension may also see similar changes and close some loopholes. MIIT said that this move was due to new changes such as low-carbon development that have put forward new requirements for the industry, and it is therefore to further deepen the supply-side structural reform of the steel industry.

Most market participants believe that the reduction ratio will be increased, which is urgent to rebalance supply to the extended decline in demand expected in the coming years. The preference for low-carbon emissions equipment should continue.

But there may also be resistance. "In addition to steel mills, local governments may not be willing to support new policies requiring more production cuts, for the sake of GDP and employment," a mill source commented.