Chinese government has been working aggressively on tightening the regulations related to capacity swaps. The country is likely to replace its outdated steel capacities with the new technologies and manufacture more value-added products. The Chinese government has encouraged more companies to start new plants to replace obsolete capacity, stated a notice by the Jiangsu Iron and Steel Association. Capacity swaps are China’s way of tackling the oversupply of steel and lowering pollution. Closure of older and polluting plants is likely to increase ferrous scrap usage and consumption in the long term.
More regions under stricter rules
In early 2020, the government had halted new capacity replacement process in order to stop the steel mills from expanding their production capacities under the pretext of capacity swaps. Many steel mills had expanded their capacity without replacing outdated units claiming they were not located in the regions selected for pollution control. With the new draft guidelines, the government has expanded the key polluted regions to include Fenwei Plain and some cities in Shandong and Henan provinces.
It has been proposed that the capacity swap ratio in the key polluted areas will be increased in order to spur the replacement process. Capacity swap ratio could be above 1.5 to 1 compared to the 2018 levels of 1.25 to 1.
New capacity to increase scrap usage
Since 2016, the country has cut more than 150mn mt of outdated steel capacity and another 140mn mt of low-grade steel production. With the increased adoption of scrap-based steelmaking to lower pollution, the China’s ferrous scrap consumption has been on an uptrend. China’s scrap-intensive electric furnace production could soar from less than 80mn mt in 2017 to 142.6mn mt by 2022. Total steel scrap consumption soared by 15pc to 215.93mn mt in 2019, this compares to 187.77mn mt in 2018. The proportion of steel scrap used in the China rose to 21.7pc in 2019.