China Shuts 42m Tons of Steel Capacity

China shut 42.39 million tons of crude steel capacity in the first half of 2017, equal to 84% of its target for the whole year, a government official said at a meeting of the country’s steel industry body on Friday.

The country has essentially completed its five-year target, set last year, to cut between 100 million and 150 million tons of excess steel capacity within less than two years, said Xia Nong, an inspector with the National Development and Reform Commission, at the China Iron and Steel Association’s  annual meeting, Reuters reported.

China made the pledge January 2016 as it bid to put an end to a price-sapping capacity glut that had left the country’s massive steel sector mired in debt and losses.

The capacity cuts made this year do not include a nationwide campaign to shut down illegal low-grade steel production, believed to amount to around 100 million tons a year, which was completed by the end of June.

Jin Wei, CISA’s president, said that all low-grade producers in China had already been forced to cease operations, according to an account of the meeting published on CISA’s official website.

Jin also warned steel producers that despite rising output and improving steel product prices in the first half of the year, profits still remained relatively low and the sector was still struggling to make a sustained recovery, especially after a steep decline in export volumes.

Chinese steel production rose 4.6% in the first half of this year to 419.75 million tons, with production reaching a record monthly high in June, data from the National Bureau of Statistics showed earlier this month.

Profits of the ferrous metal processing sector rose 1.1 times year-on-year in June, compared with 5.7% growth in May, due to the surge in steel prices and low comparison base, NBS data showed earlier this week. China’s giant steel sector churned out 72.78 million tons of the stuff in June. That was equivalent to annualized production of 891 million tons.

The previous monthly output record was set in May 2014 at 71.16 million tons. This year, however, that historical landmark has been exceeded in every month since February.

But the underlying reality is that China’s steel mills are being incentivized to lift production rates by strong prices. That of Shanghai steel rebar, used primarily in the construction sector, was last week trading at levels not seen since the end of 2013.