In depth observation: supply side storm in China's steel market Abstract: we believe that in a broad sense, de capacity can be divided into reducing the production capacity of statistical caliber and eliminating illegal hidden capacity, such as "ground bar". According to the data of the Ministry of industry and information technology, by the end of 2015, China's crude steel production capacity was 1.2 billion tons, which is the capacity of statistical caliber; The production capacity of "ground bar" is not within the statistical range because it belongs to illegal production
since 2017, supported by the stabilizing demand of downstream real estate, infrastructure, construction machinery and other industries, and thanks to policies such as the continuous promotion of the industry's capacity reduction, the clean-up of "ground bars" and the tightening of environmental protection and production restriction, the industry's supply side has maintained a tight contraction trend, the industry's supply and demand pattern has been continuously improved and tends to be in tight balance, driving the industry's prosperity to continue to pick up, the overall trend of product prices is strong, and the industry's profits far exceed expectations. Looking back at the industry trend in 2017, we still have questions about the extent of supply side improvement this year? What is the continuity of supply side tightening? How will the industry supply and demand pattern evolve in the future? This paper will analyze the above problems from the perspective of policy effect and continuity on the supply side
implementation of supply side reform on capacity reduction
we believe that capacity reduction in a broad sense can be divided into reducing the capacity of statistical caliber and eliminating illegal hidden capacity, such as "ground bar". According to the data of the Ministry of industry and information technology, by the end of 2015, China's crude steel production capacity was 1.2 billion tons, which is the capacity of statistical caliber; The production capacity of "ground bar" is not within the statistical range because it belongs to illegal production. Next, the analysis will be carried out in two dimensions: the de capacity within the statistical caliber and the hidden capacity such as "ground bar"
I. de capacity within the statistical caliber
2016 is the first year for the iron and steel industry to promote the supply side structural reform. The central government has made it clear that the de capacity target of the iron and steel industry during the 13th five year plan is 140million tons. Reviewing the implementation of capacity reduction in 2016, the annual crude steel capacity was resolved by more than 65million tons, exceeding the annual target of resolving 45million tons of crude steel capacity. However, according to incomplete statistics, about 70% of them are invalid production capacity, mainly production capacity that is discontinued or semi discontinued. The production capacity involved is limited. Only Henan, Hebei, Shandong and other places have reduced some effective production capacity
2017 is the year of deepening the supply side structural reform. The government work report proposed to reduce production capacity in a down-to-earth and effective manner, and further reduce the steel production capacity by about 50million tons. From the perspective of completion, by the end of June 2017, China had reduced its steel production capacity by 58.39 million tons, exceeding the annual target ahead of schedule. From the perspective of de capacity speed, since the de capacity work in 2017 is the continuation of 2016, with the advantages of policy continuity and efficient implementation, the de capacity promotion speed is significantly faster than that in 2016. As mentioned above, 117% of the annual de capacity target tasks were completed in the first half of 2017, while only 30% of the annual tasks were completed in the same period last year. From the perspective of implementation quality, since most of the invalid capacity has been removed in 2016, most of the capacity removal in 2017 was based on the effective capacity. According to incomplete statistics, more than 70% of the capacity was in production
from the perspective of capacity reduction space in the future, by the end of June 2017, the country had reduced the crude steel capacity by 123 million tons (including 65million tons of crude steel capacity reduced in 2016). Only 17million tons remained from the goal of reducing the crude steel capacity by 140million tons during the 13th five year plan period, and there was limited space for future capacity. However, from the perspective of the "13th five year plan" capacity reduction target of all provinces in China, as the top three steel producing provinces in terms of domestic crude steel output, the capacity reduction targets of crude steel caliber in Hebei Province, Jiangsu Province and Shandong Province during the "13th five year plan" are 49.13 million tons, 17.5 million tons and 15million tons respectively (accounting for about 60% of the national capacity reduction target task in total). At present, Hebei Province, Jiangsu Province and Shandong Province have respectively completed 64.85%, 70.29% (based on the completion of the whole year on schedule) and 53.13% of the capacity reduction targets in the 13th five year plan. It is estimated that the remaining capacity reduction tasks will total about 30million tons of crude steel capacity. According to the existing capacity reduction scale of the national statistical caliber and the remaining capacity reduction tasks of the three provinces, the steel capacity reduction during the "13th five year plan" period is expected to exceed the existing target of 140million tons. In addition, as most of the invalid capacity has been removed in the early stage, it is expected that the remaining capacity reduction task will involve more in-process capacity
II. Invisible production capacity - cleaning up "ground bar steel"
"ground bar steel" as inferior steel has always been the focus of the national crackdown. The medium frequency furnaces and other equipment mainly used to produce "ground bar steel" have also been included in the list of backward equipment that should be eliminated. However, due to the interests of local governments, the concealment of production operations and other factors, the previous crackdown on "ground bar steel" has had a general effect. With the comprehensive implementation of the supply side reform since 2016, which takes the removal of production capacity as the top priority, cleaning up the "ground bar" has become an important work for the removal of production capacityIn December 2017, some senior officials in Jiangsu and Hebei provinces were held accountable by the central government for the illegal production and construction of iron and steel enterprises in the region. Subsequently, five ministries and commissions, including the national development and Reform Commission, issued a notice on curbing the illegal production capacity of iron, steel and coal and cracking down on the steel bars, requiring that the "steel bars" in all provinces be completely eliminated by June 30, 2017 (see Annex I for the policy of cleaning up the "steel bars"). By the end of June 2017, 27 provinces (autonomous regions and municipalities) in China had banned and shut down more than 600 "ground bar steel" production enterprises, involving a production capacity of about 120million tons, equivalent to about 70million tons of crude steel. If the annual output of 800million tons of crude steel is calculated, it accounts for about 9% of the national output (the output of "ground bar" is not within the statistical range of 800million tons of crude steel output). On the whole, the supply side structure has been effectively improved after the "ground bar" has been cleaned up. At present, all relevant enterprises have stopped production, cut off water and power, and it is unlikely to resume production on a large scale in the future. In addition, in the process of cleaning up the "floor bar", some regions have adopted a one size fits all approach to the medium frequency furnaces (some of which are also used for regular steel production), so cleaning up the "floor bar" also has a certain capacity spillover effect
2 the supply and demand data of scrap and other materials become an effective indicator to monitor the effect of cleaning up the "ground bar steel"
as the "ground bar steel" capacity is an implicit capacity, this part of the output (about 70million tons) does not fall within the scope of crude steel output statistics of the National Bureau of statistics. With the promotion and completion of the comprehensive clean-up of "ground bar steel", some of the original downstream demand of "ground bar steel" is supplemented by the capacity within the statistical caliber to a certain extent. At the same time, benefiting from the strong downstream demand of the steel industry in 2017, the crude steel output in January September maintained a high year-on-year growth rate. On the other hand, most of the medium frequency furnaces that produce "floor bar" use scrap as raw material, and the domestic scrap market has maintained a tight balance. Since 2014, China's scrap import and export has basically maintained a net import of about 200000 tons per month. However, with the gradual completion of cleaning up "floor bar", the scrap resources originally produced by "floor bar" have been released. Since May 2017, The status of net import of scrap steel in China has gradually changed and changed to a large amount of net export
III. future development direction of de capacity work
in the first two years of the supply side reform, the overall promotion speed of de capacity work was fast and the de capacity effect was good. Through calculation, the utilization rate of crude steel production capacity in the industry in the first three quarters of 2017 was close to a benign level of 79%. In the medium and short term in the future, the de capacity work will continue. However, due to the limited space for de capacity in the future, de capacity cannot become a normal work in the industry. It is expected that it will show the following characteristics
1 preventing the resumption of production has become the focus of the work. As the work of reducing the total production capacity at one time, the possibility of large-scale resumption of production by local steel enterprises is very small under the combined effect of large administrative pressure and high blast furnace resumption cost. However, in the later stage, some small-scale enterprises may face the illegal resumption of production under high industrial profits. With the normalization of central supervision, it will help to prevent the illegal resumption of production
2 the de capacity of key provinces will significantly affect the crude steel production in the province. With the de capacity work entering the "deep water area", especially the remaining tasks in key provinces such as Hebei are mostly "hard bones" actually in production. Reducing this part of capacity will affect the crude steel production in the region
3 capacity reduction and replacement will continue and become the mainstream practice of capacity removal. However, since the general operation mode of capacity reduction and replacement is to remove the original equipment after the new capacity is put into operation (as shown in the capacity replacement scheme of new metallurgical steel in Table 2), its contribution to the scale of capacity removal is very small in the short term
4 due to the rapid progress of planned capacity removal, if the recovery of industry prosperity is limited, the national level may increase the scale of capacity removal
normalization of environmental protection and production restriction
since 2016, the iron and steel industry has made remarkable achievements in reducing production capacity, and the overall recovery of the industry brought about by the supply side reform is obvious to all. At present, the demand brought about by economic stabilization has improved, superimposed with the effective contraction of the supply side, and the overall supply and demand of crude steel in China is relatively balanced. Considering the limited capacity removal space in the future, the normal operation of environmental protection and production restriction may have a substantial impact on the effective capacity of the supply side of the steel industry. The specific analysis is as follows: since the beginning of 2017, with the introduction of the environmental protection production restriction scheme for the 2+26 urban heating season and the positive response and formulation of the production restriction scheme by regional governments, environmental protection production restriction may gradually become one of the important factors affecting supply and demand. In general, the production restriction in the heating season may have a certain impact on the overall crude steel output, resulting in a regional and phased imbalance between supply and demand, which may lead to upward fluctuations in steel prices
I. environmental protection and production restriction policy
2017 is the acceptance year of the air pollution prevention and control action plan released in 2013, that is, the ten articles of the atmosphere. However, from the current PM2.5 data of Beijing and the surrounding Beijing Tianjin Hebei region, the standards formulated by the ten articles of the atmosphere have not been met. In order to fully complete the assessment indicators of the ten atmospheric regulations, in February 2017, the Ministry of environmental protection of the people's Republic of China issued the 2017 work plan for the prevention and control of air pollution in Beijing, Tianjin, Hebei and surrounding areas, officially opening the prelude to the air governance battle for the purpose of environmental protection. For the whole iron and steel industry, the plan requires that the iron and steel production capacity of 2+26 cities be limited by 50% in the annual heating season. Subsequently, the Ministry of environmental protection issued a document again in August to emphasize and supplement, and required the cities involved to submit their respective production limit lists before the end of September. Up to now, all key cities, major provinces and other cities involved in production restriction have also successively released their own production restriction schemes for the heating season
according to the detailed plans published by various regions, the production restriction plans of the four key cities are obviously more specific. For example, the speed difference between the power input end and power output end of the clutch is allowed. Tangshan city introduces a third-party evaluation organization to score all the steel in the city according to the pollutant emission performance level, and divides them into three categories according to different scores. Different production restriction ratios are adopted for the three categories of enterprises, rather than the "one size fits all" model. For Tangshan, a region with large production capacity and slightly different qualifications of steel enterprises, such a way of limiting production has maintained a certain fairness. The purpose of this production restriction is mainly to solve environmental problems, and the division of enterprises by emission indicators also increases the differentiation level of enterprises with different qualifications, the survival of the fittest, and gradually achieve the goal of eliminating enterprises that fail to meet environmental protection standards. It is worth noting that the limited capacity of 18.21 million tons in the heating season announced by Tangshan City and its iron making capacity of 132 million tons (year