Today, steel is old news in China. Gone are the days of the Mao Zedong era, where, in the 1950’s, the emperor fueled a national obsession over the industrial metal. According to a recent article from the Wall Street Journal, “In the five years up to 2017, Beijing wants 80 million metric tons of old steel making capacity wipe from existence nationwide.” The decision amounts to 7% of total current capacity.
Managers of steel plants, once fervently courted by party bureaucrats and business leaders, told reporters three years ago that they no longer felt welcome in Beijing.
Part of it is the development of environmental policy. Public pressure grew on the government for policy changes as Chinese became more aware of the health risks of the smog generated by thousands of steel mills scattered across the country. President Xi Jinping last November revealed historic climate targets to reduce coal use that would inevitably affect the steel industry, one of coal’s largest buyers.
Economic slowdown is another reason. To fend off the effects of the U.S. financial crisis six years ago, Beijing flooded its banking system with trillions of yuan and told banks to lend aggressively. The steel industry was one of the prime recipients. From 2008 to 2014, Chinese mills added roughly 540 million tons of steel making capacity, by now totaling 14 times the annual steel output of the U.S, says the article.
By 2014, however, it was becoming clear that China’s steel demand was not growing. Steel oversupply flooded the market and Chinese steel prices fell 55% starting in 2012, and have not yet cease to fall.
“Mills are now under pressure as China’s economy slows to its weakest growth level in 25 years.” The industries that fuel the steel furnaces have already been sinking, partly due to global oversupply. As a result, iron ore mines have become ghost towns, coal mines are disappearing, and steel mills are losing the ability to pay for the debt they so willingly took on.
The government is trying to come up with innovative was to make the industry more efficient. One is to push steel factories overseas. Another, announced in 2014, is to let foreign investors take equity in the steel sector. The article claims that there have not been any takers, so far.