**Steel Industry: 'Deep Autumn' or the Onset of 'Winter'?**
The steel industry is only entering its 'deep autumn', and the real 'winter' has yet to arrive. According to Xu Lejiang, chairman of Baosteel Group Co., Ltd., the era of severe overcapacity in China’s steel sector is expected to occur during the '13th Five-Year Plan' period. While the term "steel winter" has been widely used in media and among industry experts, Xu believes that the current situation is more akin to a 'deep autumn'—a time of slow recovery, not a full-blown crisis.
However, the data tells a different story. 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 operating at a loss. This paints a bleak picture, suggesting that the industry is still struggling despite some signs of stabilization.
Xu warns that the steel industry may soon face a long period of low profitability, even annual losses, due to factors such as oversupply, high raw material costs, and the involvement of financial capital in the sector. He emphasizes that the current phase is not the lowest point, but rather a transitional stage before a more severe downturn.
As the saying goes, "One pound of steel lost to a cabbage," now it's "a ton of steel profit isn’t enough to buy a popsicle." For steel companies, survival is the priority, and hope is limited. Xu suggests that while the government might introduce economic stimulus measures, it is unlikely to significantly boost demand for steel. Instead, companies must take matters into their own hands by strengthening self-discipline and controlling production.
But this control isn't just about reducing output—it's about making tough decisions, such as refusing to produce without contracts, avoiding unnecessary costs, and ensuring that every action aligns with market conditions. Xu sees this as one of the few viable solutions to address overcapacity in the long run.
So where exactly is the overcapacity coming from? Xu points out that it's a common issue across many Chinese manufacturing sectors, but the steel industry is particularly affected. One reason is the historical focus on GDP growth, which led local governments to prioritize steel production as a key pillar of the economy. Steel companies often contribute significantly to local GDP, tax revenue, and employment, creating strong incentives for expansion.
In fact, cities like Shizuishan in Ningxia have added millions of tons of new steel capacity, reflecting a trend that Xu calls the "tip of the iceberg." Many projects are driven by short-term gains, with little regard for long-term sustainability. The lack of market-driven mergers and acquisitions has also contributed to the problem, as smaller steel companies resist consolidation and instead expand independently, leading to further overcapacity.
Under China’s indirect financing system, larger companies have an advantage in accessing credit, which encourages small and medium-sized firms to grow in scale to survive. This has fueled rapid expansion, but it's no longer a sustainable strategy. As Xu bluntly states, "Pursuing scale today is leading to death."
Looking ahead, Xu predicts that the worst may be yet to come. While China’s steel industry has managed to maintain a capacity utilization rate above 75% so far, he believes the peak is near. If the industry fails to adjust, it could face a scenario similar to developed countries, where utilization rates drop below 60% and demand begins to decline.
To prepare for this, Xu urges the industry to plan for the worst, including scenarios where capacity utilization falls below 60%. He stresses the need for proactive strategies to avoid extreme overcapacity and ensure long-term stability.
Despite the challenges, overcapacity can also serve as a test of maturity. Moderate overcapacity can drive competition and innovation, but it must be managed carefully. Xu advocates for a market-based approach to resolve the issue, moving away from administrative controls and toward a more efficient, competitive environment.
He supports the recent efforts by the State Council to reduce regulatory barriers, as this could help eliminate artificial scarcity and improve capital efficiency. However, he also emphasizes the importance of setting clear rules and standards for new entrants, as well as creating mechanisms for capital to exit the industry when necessary.
Finally, Xu highlights the role of market-driven mergers and acquisitions in addressing overcapacity. Unlike traditional approaches that focused on expanding scale, modern M&A should aim to streamline operations and eliminate outdated capacity effectively.
In conclusion, the steel industry is at a crossroads. While the 'deep autumn' is still here, the 'winter' may be just around the corner. Only through smart policy, market discipline, and strategic planning can the industry navigate this challenging period and emerge stronger.
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