Xu Xiangchun: Avoiding "involution" requires the concerted efforts of self-discipline in production control and policy guidance
The industry's performance improved somewhat in the first quarter of this year. This was partly due to the effective self-discipline and production control measures implemented by steel companies at the beginning of the year, and partly because the price of raw materials such as coke and coal fell more sharply than the price of steel, sacrificing some profit margin. coke and other raw materials steel prices This has led to a partial transfer of profit margins. Historically, as a cyclical industry, any improvement in the steel industry's profits during a downturn may be short-lived and temporary. Since March, steel prices have fluctuated downwards, and the market outlook is not optimistic. Therefore, the steel industry must avoid "involutionary" competition; self-discipline in production control and policy guidance are both indispensable." On May 26, Xu Xiangchun, an expert from the Publicity Committee of the China Iron and Steel Industry Association and general manager of Shanghai Steel Union Information, emphasized this point in an interview with a reporter from China Metallurgical News, focusing on issues such as industry self-discipline and production control. steel market 专家组专家、上海钢联资讯总监徐向春围绕行业自律控产等问题接受《中国冶金报》记者专访时强调。
Policy guidance on expectations is crucial
Xu Xiangchun believes that policy guidance on expectations is crucial. "The current market is prone to panic and pessimism, largely because policy guidance on expectations is weak. If production control policies remain unclear, the market will assume that production control this year is not mandatory, making it difficult for the market to have an optimistic outlook on fundamentals." He said, "Prices are determined by supply and demand, but are also affected by changes in sentiment and expectations. If market sentiment remains pessimistic, prices will be difficult to rise, and corporate profits will be difficult to improve. If production control policies can be introduced and implemented effectively as soon as possible, it will play a positive role in boosting expectations."
From a demand perspective, if the market does not quickly enter a new round of supply-demand balance, there may still be some room for steel prices to fall. In this situation, can we only rely on market forces to drive restructuring?" Xu Xiangchun believes that this is not necessarily the case. The key is for the supply side to take the initiative, promoting the formation of a new supply-demand balance in the market. This can be achieved through strengthening self-discipline in production control and government policies for adjustment and intervention.
At a recent meeting, the National Development and Reform Commission clearly defined "selling at low prices, ultra-low prices, or even below cost" as typical "involutionary" competition. Xu Xiangchun believes that the current practice of selling below cost in the steel industry fully meets this characteristic. He emphasized that rectifying "involutionary" competition requires specific policy measures that must be effectively implemented. "Since self-discipline is difficult, we must use a 'visible hand' to regulate."
Some believe that mandatory national production control will affect local economies and employment, and even that, as a continuous production industry, production control in the steel industry is likely to cause safety accidents. Xu Xiangchun has a different view: "In fact, the steel industry's outstanding performance in winning the battle for blue skies is enough to prove that these concerns are unnecessary. From 2017 to 2019, the steel industry in key regions implemented staggered production every autumn and winter. Looking back, this not only did not lead to safety accidents, decline in business performance, or job losses, but instead resulted in some of the industry's most profitable years. This clearly shows that effective production control measures can stabilize prices and industry profits, which is entirely achievable."
For the steel industry, self-discipline in production control alone is not enough; the key is to orderly resolve inefficient and backward production capacity. Although this process is quite long, we must recognize that achieving a stable and orderly adjustment of the industry requires policy support." Xu Xiangchun suggested, "In short, only with stable steel prices can steel companies have a sustainable profit environment; otherwise, temporary improvements in profits will be short-lived."
Self-discipline in production control: Large steel companies should play a "leading" role
Everyone agrees that self-discipline in production control is important, but it's difficult to do. Why?" Xu Xiangchun frankly admitted that in exchanges with some steel companies, he found that some companies were unwilling to reduce production even if they knew they would lose money in the second half of the year, often clinging to the idea that "we must not reduce production when there are profits and give up the market to competitors." "If everyone thinks this way, the supply side will not be able to adjust."
Xu Xiangchun believes that self-discipline in production control is important, but it is meaningless to talk about it when steel prices plummet and companies are losing money; this is passive production reduction. When prices are generally stable, market expectations begin to weaken, and companies have some profits, everyone should reduce production together; this is ideal self-discipline in production control. "When you can't hold on any longer and then reduce production, it's not self-discipline. The current production reduction is basically market-driven. It may still be possible to achieve the annual production reduction target by the end of the year, but companies will pay a heavy price, causing the industry to struggle again on the brink of losses, or even suffer significant losses." He said.
In recent years, regional self-regulatory organizations have also emerged in the steel industry, but due to their small size, their impact on the overall market is limited." In Xu Xiangchun's view, self-discipline in production control by one or two companies is unlikely to have any practical effect. The entire industry needs to strengthen self-discipline in production control, especially large steel companies should play a "leading" role.
We buy everything at high prices and sell everything at low prices because our scale is too large. Currently, the contradiction between supply and demand in China's steel industry is very prominent. Coupled with the large scale of supply, even a slight increase in production capacity can easily exacerbate the supply-demand contradiction, leading to price wars." Xu Xiangchun believes that the steel industry should learn from the cement industry and strengthen industry self-discipline.
The demand for cement peaked as early as 2014, much earlier than the steel industry, and the degree of overcapacity in the cement industry is also more serious than that of the steel industry. However, the cement industry has reached a consensus not to engage in price wars, and the staggered production measures of cement companies are also very effective, with the industry's profit margin significantly higher than that of the steel industry." Xu Xiangchun pointed out that the key to the adjustment of the cement industry lies in the change in the supply-demand relationship. Only under this premise can industrial structure adjustment and the resolution of ineffective and backward production capacity be carried out, thereby further addressing deeper problems.
Steel exports exceeding 100 million tons will have significant side effects
It will become increasingly difficult to rely on exports to absorb excess production." Combining recent anti-dumping cases launched by foreign countries against Chinese steel products, Xu Xiangchun analyzed, "Some believe that China's steel exports account for only 10% of China's steel production, which is not high. However, in reality, China's steel production is large, and even if only 10% is exported, close to 100 million tons, it still accounts for more than 20% of the global steel trade volume of over 400 million tons."
Xu Xiangchun's research found that when a country or region's steel exports account for about 20% of the global steel trade volume, it will enter a period of concentrated international trade friction, such as Japan in the 1970s and 1980s and the Commonwealth of Independent States before 2000. In 2015, China's steel exports exceeded 100 million tons, accounting for more than 20% of the global steel trade volume, leading to increased trade friction. "At that time, China promoted supply-side structural reforms, the domestic steel market situation improved, steel prices rose, and later measures such as the cancellation of export tax rebates were also adopted, so exports naturally decreased." He said.
