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China seen set to add 50 mil mt/year of flat steel capacity in 2 years despite manufacturing downturn

China is on track to commission more than 50 million mt/year of new hot-strip mill capacity over the next two years, despite the pressure on flat steel prices caused by the manufacturing downturn, S&P Global Platts estimated Wednesday.

China will commission 10 new hot-strip mills this year with a combined production capacity of 22.6 million mt/year, and another eight hot-strip mills with a total capacity of 28.2 million mt/year in 2021, Platts calcuations showed.

These new projects come after 26.5 million mt/year of new capacity was added in 2019.

This means that over a three-year period, China will have added 77.3 million mt/year of new flat steelmaking capacity.

But this comes as manufacturing has been struggling, both in China and overseas – a situation that is being compounded by the coronavirus pandemic.

As a result, flat steel demand from manufacturing is likely to remain depressed through much of 2020, with the auto sector hit especially hard.

China’s output of medium-wide hot-rolled coil rose 11% year on year to 39.85 million mt over January-March, National Bureau of Statistics data showed. This was despite China being in lockdown for much of the quarter due to the COVID-19 outbreak. Some market sources attributed the rise in output to the HRC capacity expansion.

Demand has also dried up outside of China since late March as lockdowns were increasingly imposed across multiple countries. Chinese mills have been forced to cut export offers further since the beginning of April, despite an improvement in the domestic market.

However, these offers were still too high to conclude any deals – due to the intense competition from other countries – depriving China of the ability to export to offset the oversupply in its domestic market.

Some market sources said the oversupply situation was likely to persist in China’s HRC market for most of this year given the rising HRC production capacity and depressed manufacturing activity. Therefore, the recent improvement seen in domestic HRC margins was unlikely to be sustained.

Domestic HRC margins have been below breakeven levels for most of April but have recovered since the middle of the month to reach a recent high of $23.69/mt on April 20, Platts data showed.
REPLACEMENT, IN THEORY

Most mills that are building new hot-strip mills are carrying out pig iron and crude steel capacity replacements, either by closing existing facilities, or by purchasing pig iron and crude steel capacity quotas from other mills.

For example, Hebei Iron & Steel (Hegang) plans to commission a new 4 million mt/year capacity hot-strip mill producing 2,050 mm wide material at its greenfield integrated Laoting steelworks in northern China’s Hebei province.

The works will see the first of two blast furnaces and two converters commissioned in the second half of 2020 with 4.88 million mt/year of pig iron and 4.98 million mt/year of crude steel capacity. These new facilities are based on closures of a combined 6.1 million mt/year of pig iron and 6.2 million mt/year of crude capacity at Hegang’s four subsidiaries, producing both long and flat steel.

In theory, China’s capacity swaps will help to reduce its iron and steel capacity, and thus the overall flat and long steel production capacity would not increase.

However, Platts calculates that China’s net crude steel capacity expansion was 42 million mt/year in 2019, and will be 15 million mt/year in 2020 and 11 million mt/year in 2021.

China will commission a total of 92 million mt/year of crude steel capacity in 2020, some 42% of which will feed flat rolling mills, while the balance will go to long steel products, the calculations showed.
Source: Platts

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