**The Steel Industry: Entering 'Deep Autumn' but Not Yet 'Winter'**
The steel industry is currently only entering the "deep autumn" season, and the real "winter" has not yet arrived. According to Xu Lejiang, Chairman of Baosteel Group Co., Ltd., the era of severe overcapacity in China's steel industry is expected to occur during the "13th Five-Year Plan" period. This statement reflects a cautious outlook on the future of the sector.
While the term "steel winter" has become a common phrase in media and among industry experts, Xu Lejiang believes that the current situation is more accurately described as "deep autumn." In his view, this phase indicates a slow recovery rather than an imminent crisis. However, he warns that the real challenges are still ahead.
In the first half of the year, the steel industry reported a sales profit margin of just 0.13%, with 40.7% of large-scale industrial enterprises suffering losses. These figures highlight the severity of the situation, which Xu Lejiang refers to as "deep autumn." He emphasizes that if the industry reaches the so-called "cold winter," the consequences could be far worse.
Xu Lejiang warns that due to oversupply, high raw material costs, and financial capital involvement in the steel sector, the industry will likely remain in a low-profit state for a long time, possibly even experiencing annual losses. He urges companies to take action now, as the government may introduce economic stimulus measures, but it’s unlikely to provide significant relief for the steel industry.
In the short term, the most effective strategy for steel companies is to strengthen self-discipline and control production. Xu stresses that this doesn’t just mean reducing output—it also involves refusing contracts without payment, avoiding unnecessary production, and managing costs carefully. This approach, he says, could help address the issue of overcapacity.
So where exactly is the overcapacity coming from? Xu Lejiang points out that it's a widespread problem across Chinese manufacturing, particularly in the steel industry. He notes that local governments have historically pushed for expansion under the pressure of GDP growth, leading to excessive capacity. For example, Shizuishan City in Ningxia added 3 million tons of new steel production capacity, which he sees as just the tip of the iceberg.
Additionally, the lack of market-based mergers and acquisitions has contributed to the proliferation of small steel companies, many of which resist consolidation and instead expand on their own. This has led to rapid growth in steel production capacity, further exacerbating the overcapacity issue.
Xu also highlights the role of China’s indirect financing system, which favors larger firms. Smaller steel companies often rely on debt to grow, even when it leads to inefficiency. This dynamic has allowed many private steel firms to expand quickly, despite weak profitability.
Looking ahead, Xu predicts that the peak of steel production is not far off. While China's steel demand has dropped significantly, it hasn't yet turned negative. However, he expects the turning point to come during the "13th Five-Year Plan" period. He urges industry players to prepare for the worst-case scenario, including a capacity utilization rate below 60%.
Despite the challenges, overcapacity can also serve as a test for industry maturity. Moderate overcapacity can drive competition and innovation. But Xu stresses the need for a balanced approach, recognizing both the risks and the potential benefits.
To resolve overcapacity, Xu argues that market-based solutions are essential. Administrative controls should be replaced by market forces. The government must create clear rules and standards, such as energy efficiency and emissions requirements, while also enabling the free entry and exit of capital.
He also suggests the need for a third-party trading platform to facilitate the withdrawal of capital from the steel industry. Additionally, mergers and acquisitions should focus on efficiency rather than scale, avoiding the pitfalls of politically driven reorganizations.
In conclusion, the steel industry is at a critical juncture. While the "deep autumn" has not yet turned into a full-blown "winter," the path forward requires careful planning, market discipline, and structural reforms to ensure long-term sustainability.
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