Is a new round of steel production capacity released for Baosteel Zhanjiang blast furnace ignition?

At a time when the steel industry is deeply trapped in overcapacity, Baosteel Co., Ltd. (hereinafter referred to as "Baosteel") has announced the production of the million ton Zhanjiang Steel Base project (hereinafter referred to as "Zhangang").

Three years ago, when the National Development and Reform Commission approved the Zhanjiang Steel project, Zhanjiang City Mayor Wang Zhongbing happily kissed the approval documents, making Zhanjiang Steel famous with one kiss. However, three years later, the steel industry had severe overcapacity, and steel prices continued to decline. As a result, the Zhan Steel project was known as "out of time" in the industry.

Chen Yuejin, from the Steel Business Unit of Shanghai Steel Union, told China Business Daily that Zhan Steel has gone through too long a construction cycle, and at present, the demand for high-quality steel in China has significantly decreased. Zhan Steel will face an awkward situation from the beginning. At the same time, the ignition of Baosteel's Zhanjiang blast furnace indicates the beginning of a new wave of steel production capacity release in China.

DreamWorks put into operation

On September 27th, Baosteel announced in a notice that the construction of Zhan Steel's "No.1 blast furnace" began in May 2013. Its designed first generation furnace has a lifespan of 22 years, a furnace capacity of 5050 cubic meters, and an annual production of 4.1 million tons of molten iron. It will be fully put into operation in September next year, and the crude steel scale of the project will reach 8.75 million tons.

It is understood that after the first blast furnace is put into operation, the 2250mm hot rolling line and 2030mm cold rolling line at Zhan Steel Base will also be put into use in January and March 2016, while the second blast furnace is planned to be put into operation in June next year.

Looking back at history, the birth of Zhan Steel carries a special mission: in March 2008, the National Development and Reform Commission requested Baosteel to merge and restructure Shaogang and Guangzhou Steel, with Baosteel holding the company to establish a new company. Guangdong Province should combine the construction of Zhan Steel's project to eliminate the backward steelmaking capacity of 10 million tons in the province.

At that time, starting from 2007, Guangdong Province successively shut down and eliminated 16.14 million tons of crude steel production capacity in Guangzhou, Shaoguan, and other places, and compressed 6.14 million tons of crude steel production capacity. As an investor in Zhan Steel, there was no exception. Baosteel eliminated 6 million tons of production capacity in Shanghai, paving the way for Zhan Steel.

Analyst Xue Heping stated that in 2007, domestic steel demand was strong, and the establishment of Zhan Steel met the production capacity demand at that time. Zhan Steel is considered an important step for Baosteel to increase production capacity. It is understood that Zhan Steel initially planned to invest 69.7 billion yuan, but when the project plan was finally approved in 2013, it was reduced to 41.5 billion yuan. Later, during construction, Zhangang decided to add another production line with a total investment of approximately 54 billion yuan.

Zhan Steel is Baosteel's' dream factory ', and it is a top priority for Baosteel both in the early stages of construction and in the future. It naturally adopts many advanced technologies and financial support in production technology and energy conservation and environmental protection, "said Chen Yuejin.

How to resolve production capacity

However, in today's industry with slowing demand and overcapacity, can Zhan Steel break through the encirclement of overcapacity?

Zhan Steel is generally improving, and the trend in the current steel industry is to eliminate outdated and establish new production capacity. Zhan Steel is an important measure for Baosteel to promote the structural adjustment of the steel industry and improve the strategic layout of domestic and foreign markets.

Even so, the future fate of the steel industry remains uncertain, and the contradiction between production capacity and prices still needs to be resolved.

With the continuous decline in steel prices, the futures prices of rebar, mainly used for construction, have almost halved in the past two years, while the futures prices of hot-rolled coil plates used for automotive and mechanical manufacturing have fallen by 42% since their launch in March 2014.

On the other hand, China is still importing a large amount of high-grade steel. According to the statistics report of the General Administration of Customs, China imported a total of 6.65 million tons of steel in the first half of the year. However, based on a 94% yield rate, China's net export of steel, equivalent to crude steel, reached 48.67 million tons in the first half of the year.

The overcapacity of domestic steel production is mainly due to the severe overcapacity of crude steel production. In terms of refined steel and special steel, our technological content is very low and our production is also relatively low. "A person in charge of a private steel enterprise in northwest China, who declined to be named and has stopped production, revealed that the price of imported steel in China is usually twice or even higher than the price of exported steel, This reflects that China's steel overcapacity is mainly concentrated in the production process of low-end products.

The person stated that the current domestic steel inventory level is over 1 billion tons, and 900 million tons are all lower grade products such as crude steel. This number is very frightening. At the current rate of economic development, it means that China will not produce one ton of steel in the next three to five years, and our inventory will be sufficient. "He said that the huge inventory also means that steel companies are sleeping heavily with massive funds, which usually carry astonishing financial costs.

He used his own company as an example to illustrate that at the beginning of the construction of the factory, the scale of borrowing funds exceeded 5 billion yuan, and the annual expenditure of repayment of principal and interest alone reached 1 billion yuan.

New round of release

In fact, while steel prices have decreased, production has also decreased, but it is still lower than the decrease in demand, exacerbating the supply-demand contradiction.

According to data from the National Bureau of Statistics, the domestic crude steel production in the first half of this year was 410 million tons, a year-on-year decrease of 1.3%. At the same time, steel prices in China accelerated their decline in the first half of the year, with a decrease of 19.7%, surpassing the 10.6% decline seen throughout 2014.

According to data from China Steel Association, the total profit of 101 key steel enterprises in the first five months of this year was only 528 million yuan, with a loss of 16.5 billion yuan in their main business.

At that time, Baosteel reported in China News that its operating revenue in the first half of the year was 80.771 billion yuan, a year-on-year decrease of 17.24%, and its net profit was 3.174 billion yuan, a year-on-year increase of only 0.65%.

At present, there is approximately 1.2 billion tons of crude steel production capacity in China. Based on the estimated crude steel production in the first half of the year, the annual production is 820 million tons, and the capacity utilization rate is only 68%. From various data analysis, it can be seen that the domestic crude steel production capacity is in a serious surplus stage. "A securities researcher said that this is also the fundamental reason for the significant decline in steel prices and the difficulties faced by steel enterprises in production and operation.

The best way to digest production capacity is not to add new production capacity, but some projects did not anticipate the current situation at the beginning of planning. In the next one to two years, there will be a new round of steel production capacity that will be further concentrated or launched. For example, the Wuhan Iron and Steel Fangchenggang project, the Formosa Plastics Vietnam 15 million ton project, and so on. "Chen Yuejin said.

But Xue Heping does not agree with the claim of overcapacity. He said that overcapacity is increasing across the entire industry, which is only a manifestation of economic downturn. When the economy is sluggish, demand decreases and supply naturally exceeds demand. After sustained economic growth, capacity will naturally be resolved.

"At present, China's industrialization and urbanization have not yet been completed, and the demand for steel, as the basic material for economic construction, will remain at a certain scale. The national strategies such as the 'the Belt and Road' also bring opportunities for the steel industry, and it is only a matter of time to resolve the capacity," Xue Heping said.