China’s Ministry of Industry and Information Technology (MIIT) published new swap rules for new steel production capacity, in order to accelerate the elimination of low-grade and outdated steelmaking capacity and strengthen air pollution control, as reported by Caixin on May 7. According to the latest rules, the country will increase the old-for-new swap ratio for steel projects to 1.5:1 from June 1, 2021, compared to the previous 1.25:1, which means that a steelmaker needs to close at least 150,000 tons of old capacity to bring 100,000 tons of new capacity online. The more stringent swap ratio of 1.5:1 will first be applied in the key 2+26 regions, including the Beijing-Tianjin-Hebei region, the Yangtze River Delta region, as well as the Fen-Wei plain.
Due to the strong downstream demand for steel, China’s domestic steel output has been growing on a yearly basis. In 2018, 2019, and 2020, the crude steel production in China stood at 928m, 996m, and 1.065bn tons, rising 6.6%, 8.3%, and 7% YoY, respectively. Citing data from China Iron and Steel Association (CISA), the country still had 276m tons of new steel capacity under construction by the end of 2019, which would further worsen steel oversupply and overcapacity issues in the industry if all brought online. Meanwhile, China’s steel sector currently accounts for around 15% of the country’s annual carbon emissions and more than 60% of the global steel industry’s total emissions, which forms a huge challenge for China, given its climate goal to peak carbon emissions by 2030 and achieve carbon neutrality by 2060.
The Chinese government has been working on reducing overcapacity in the country’s steel industry since 2016. Between 2016 and 2018, the country cut 150m tons of outdated steel capacity, with 64.74m tons of crude steel production capacity withdrawn from inactive enterprises. For 2021, MIIT and the NDRC pledged to firmly reduce crude steel production compared to the previous year. Meanwhile, the government was seeking to promote low-carbon steel production by encouraging cleaner fuel sources and introducing iron and steel recycling standards. It also required steel producers to acquire third-party certification before applying for new projects. In addition, the steel sector might be included in the national emission trading scheme (ETS) during the 14th Five-Year Plan period. Based on the current plan, the steel industry aims to peak carbon emissions before 2025, five years ahead of the national schedule.