Capacity reduction and output control are the only way for the steel industry to get out of trouble
After decades of rapid development in China's steel industry, China has become the world's largest steel producer and consumer. However, starting in 2023, under the multiple pressures of supply exceeding demand, slowing demand growth, and persistently low prices, the steel industry has entered a long and deep period of strategic transformation, resource restructuring, business model adjustment, and pattern reconstruction, facing an increasingly complex international and domestic economic environment.
Many factors affect the healthy and high-quality development of the steel industry, but the most crucial one is the significant mismatch between production and demand. Only by resolutely reducing capacity and controlling production can the steel industry overcome the current crisis and achieve healthy and sustainable development.
The Root of the Dilemma: Long-term Mismatch between Supply and Demand
The essence of "involution" in China's steel industry is a serious imbalance between production and demand. Currently, the steel industry has entered a period of reduced production, and the situation of "too many monks and too little porridge" has intensified the "involution" among enterprises, leading the industry into "trampling-style vicious competition." Some steel companies, in order to maintain market share, continue production even at a loss, further depressing steel prices and eroding profit margins. Since 2023, the situation of persistently low steel prices and widespread industry losses has not fundamentally changed. Although industry profits have rebounded in certain periods, the fundamental imbalance of supply exceeding demand has continued.
The underlying causes are complex, involving both historical issues and institutional and systemic obstacles. Some local governments, considering GDP growth, tax revenue, and employment, provide implicit protection to local enterprises, and even expand steel production capacity through local policies. Steel companies themselves also engage in self-preservation behaviors, expanding blast furnace capacity under the guise of "technology upgrades," leading to "more capacity being eliminated the more it is eliminated." In addition, factors such as the low concentration and severe product homogeneity in the steel industry further exacerbate disorderly competition among enterprises.
For the steel industry, the tasks of reducing capacity and controlling production are arduous and urgent. It must be recognized that the high production that is mismatched with demand has serious, long-term, complex, and irreversible harm to the healthy development of the industry. If not resolved promptly, it will lead to multiple consequences: firstly, increasing market deflationary pressure; secondly, increasing financial risks, and an increase in non-performing bank loans; and thirdly, causing resource idleness and environmental pollution, such as some enterprises having a capacity utilization rate of less than 50%.
However, reducing capacity and controlling production in the steel industry faces multiple obstacles: some local governments make a lot of noise but little rain, and "zombie enterprises" remain "stiff but not dead" under the "support" of local governments; enterprises themselves lack self-discipline, and their willingness to control production is weak; cross-regional and cross-ownership mergers and acquisitions are constrained by local protectionism and debt issues, and the restructuring effect is not ideal.
Path to Escape: Systemic Reforms on Multiple Fronts
For China's steel industry to overcome its current predicament, it must adopt systemic reform measures on multiple fronts.
First, strengthen policy implementation and top-level design. Government departments should establish a long-term regulatory mechanism: on the one hand, establish a new mechanism for capacity governance to prevent "involution-style" competition; on the other hand, promote upgrades in energy consumption, environmental protection, and quality standards to force the exit of backward production capacity.
Second, promote mergers and acquisitions to improve industry concentration. Cases such as China Baowu's restructuring of Magang and Taiyuan Iron & Steel, and Ansteel's restructuring of Benxi Iron & Steel and Lingyuan Iron & Steel, show that leading enterprises can optimize regional layouts and enhance their competitiveness through resource integration. Next, the steel industry should continue to promote more cross-regional mergers and acquisitions by leading enterprises, break down local protection barriers, and form a new pattern of industrial development.
Third, strengthen corporate self-discipline and model innovation. Steel enterprises must abandon the thinking of scale expansion and turn their attention to refined and high-quality production and services. By building a modern steel supply chain, they can connect upstream and downstream enterprises to carry out strategic collaboration, strengthen the chain, and improve efficiency and reduce costs through a series of value-added services to expand profit margins. At the same time, steel enterprises should strictly control the production rhythm and firmly implement the "three certainties and three no's" business principles to avoid the vicious cycle of "trading quantity for price."
Fourth, develop international markets and accelerate green transformation. Expanding exports of high-end products is one of the main ways to digest domestic production. Steel enterprises should actively expand overseas markets through product upgrades, technological upgrades, and service upgrades to improve their international competitiveness. At the same time, under the "dual carbon" goals, the green and low-carbon transformation of the steel industry is both a challenge and an opportunity. Ultra-low emission transformation and the application of hydrogen metallurgy technology can bring policy benefits and market opportunities to steel enterprises.
Fifth, promote the orderly exit of low-end and inefficient enterprises. In the period of reduced production, some steel enterprises with low-end products, low efficiency, insufficient innovation capabilities, or even those that have become "zombies," will inevitably fail. This is the natural law of market survival of the fittest. Guiding these enterprises to exit in an orderly manner is a complex, serious, and unavoidable reality. Government departments, industry associations, and related enterprises should work together to promote the orderly exit of these enterprises. If these enterprises can actively exit and stop losses in time, they can still retain some capital, and switching to a different track may create a new path, which is also a wise choice.
In short, reducing capacity and controlling production in the steel industry is a process of "cutting the flesh to heal the wound." It requires a social consensus and the concerted efforts of the government, industry, and enterprises. Only in this way can the steel industry achieve a qualitative leap.
