China eliminates steel capacities to increase production efficiency

In mid -October, the State Council of China instructed the local authorities to stop the approval of new production capacities, freeze the construction of unauthorized projects and determine the procedure for eliminating the ineffective capacities of the steel industry for 80 million tons of steel per year. This should reduce the excess of the supply of China, which is the main driver of the weak industry of the region.

However, there is an uncertainty regarding the terms and concretization in reduction of capacities. Baosteel Group Corp and other large Chinese companies have become such as Wuhan Iron and Steel Corp will win the most because they can use their competitiveness to capture the market share of those companies that get out of it.

So far, other companies must reduce the capacity, observing the instructions of the government, Baosteel and Wisco will increase its share in the market even more, since they received permission to build new facilities in southern China from the government. So Baosteel is building a metallurgical plant in Zhangjiang with a production capacity of about 9 million tons per year, which he plans to launch in 2016.

The concentration of the Chinese steel industry will eventually increase after removing ineffective capacities. The Chinese steel industry is very fragmented compared to countries such as South Korea and Japan. The three largest Chinese companies smelted 17 percent of the production of the countries in 2012, compared with 82 percent of the first two manufacturers in South Korea and 73 percent in Japan.

In 2012, the 10 largest metallurgical companies accounted for 45.9 percent of the production of the countries, compared with 49.2 percent in 2011. Since small companies in China have expanded their potential and the scale of presence in the market.

In conditions of rigid competition, large companies have become refrained from capital investments. An excess in industry and fragmentation led to a weakening of profitability for Chinese metallurgical companies.