By Prasenjit Bhattacharya

November 19, 2019 - Beijing has started an enquiry to determine the extent of overcapacity that still exists in the steel sector, despite strict capacity-reduction measures that have been taken since 2016.

Various government departments will conduct surveys on steel capacity, focusing on mills with annualized utilization rates of more than 100pc of their rated capacity and mills with over 10pc of output growth in January-September 2019. Some mills have crossed 150pc of their rated capacity during this period.

Cumulative crude steel output in January-October was 675.18mn t, up by 5.4pc from a year earlier.

China's official steel capacity has been estimated at around 1bn t, although exact figures are hard to obtain since the national bureau of statistics publishes output and not capacity on a monthly and annual basis.

Beijing prides itself on its capacity-reduction initiative, which has been in place since 2016 and claims to have cut 150mn t/yr of steel capacity in the formal sector. The government also claims to have eliminated 140mn t/yr of largely unauthorized induction furnace capacity in 2017.

While some mills may have added capacity in violation of rules, other large Chinese producers have set up new, efficient mills in coastal areas to replace older, city-based plants, further increasing production.

Any new capacity is required to be up to 20pc lower than the plants they replace under capacity-replacement projects, but greater efficiencies at the new plants may help to offset the loss in volumes. Capacity-replacement projects are gaining pace in China as cities look to get rid of polluting mills.

A greater volume of steel sales is also being generated in the formal sector and hence accounted for, compared with the pre-2017 situation when unaccounted volumes were flowing into the market from induction furnace-based plants.

Besides, China's real estate boom that gathered pace in 2018 has further accelerated this year, providing incentives for mills to use premium iron ore and coking coal grades to produce at peak levels as most of them remain profitable. While profit levels are expected to be lower this year compared with 2018, mills typically have little incentive to reduce output unless they are selling products at a loss.