China is to release a plan that would require domestic steelmakers, who contribute more than half of global production, to keep this year’s output from exceeding last year’s levels in an effort to deal with a tepid recovery from the COVID-19 pandemic.
The move, expected by the end of this month, is a fresh reminder of official concerns over lukewarm demand, but stops short of demanding harsh cuts, said people familiar with the situation who asked not to be identified as they were not authorized to speak publicly.
The compromise addressed differing views over the economic outlook for the year, the people said.
The cap might help prices by reducing oversupply, but it would be unwelcome news for the industry, putting more pressure on mills already facing low profits and dealing with the effects of production disruptions last year.
China is the world’s biggest steel producer and consumer, but output has been declining each year since hitting a record in 2020.
It would also go some way to addressing Beijing’s green ambitions. Struggling to reduce carbon emissions and to meet climate commitments, the Chinese government has long had the steel sector in its sights.
The industry accounts for about 15 percent of national emissions, second only to electricity generation.
Last year, the pandemic hit on the economy and a government crackdown on the property market also weighed on production.
The Chinese National Development and Reform Commission, the nation’s economic planning agency, did not respond to a request seeking comment.
Hopes of a robust recovery had prompted mills to increase production as the country reopened and as China entered its traditional peak construction period.
However, demand has not picked up at the expected scale.
This week, Mysteel reported slow trading had spurred 11 Chinese mills to lower prices of steel for construction.
The planned cap on production is open to review in the second half of the year as market conditions change, the sources said.
While the central government might not require steel mills to reduce production by a certain percentage this year, a detailed target on per-tonne emissions would remain in place as a regulating mechanism, they said.
Chinese steel production climbed 5.6 percent in the first two months of this year.
Steel mills in China have been struggling for months with excess supply and increases in the prices of raw materials such as iron ore. It has prompted a sweeping campaign by the government to tame those costs, as Beijing wants to ensure that Chinese mills benefit from a stronger economy — rather than allowing foreign suppliers to claim the bulk of the profits.
A recovery is still on the horizon. A stronger-than-expected expansion in China’s credit last month signals government stimulus is working to fuel investment and the housing market is on the mend, Bloomberg economist Eric Zhu (朱懌) said.
Recent data also showed improved appetite for mortgages — another sign of life for the property market, the largest user of steel products in China.
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