China’s steel production investment in ASEAN countries – Is it the consequence of production capacity control in China?

Posted on 05 June 2018

Source: SEAISI
To improve domestic steel production capability and environmental control, China’s government has successfully minimized obsolete steel capacity in the country. It succeeded in eliminating a total 120 million tonnes of excess production capacity over the period of 2016 to 2017 and there will be further production capacity reduction of 30 million tonnes in 2018.
Along with the capacity reduction, the Chinese government also strictly prevented the addition of new capacity in order to successfully push the structural supply-side reform for the steel industry in the country. 
The Chinese government has announced an action plan to guide steel capacity cuts. Along with that, the provincial governments also launched their respective action plans to control capacity cuts in their cities. However, the local action plan differs among the difference provinces. For example, the provincial government of Hebei announced in late March 2018 an action plan to close another 10 million tonnes in 2018, 10 million tonnes in 2019 and another 20 million tonnes in 2020. 
On the other hand, the provincial government of He’nan announced that steel output in the province should be reduced by 30% during the 2018 heating season. 
As for Handan city, it announced an action plan to cut steel and electricity companies that are located in the urban area of Handan city by an additional 10% on top of the 25% average target for all steelmakers. For the companies located in the districts where the air quality is rated amongst the top three in Handan City, the reduction target can be 5% lower, while the target can be 5% higher for those located in the three districts with the worse ratings. 
The key points in the guidance for steel capacity reduction announced by Chinese government are as follows:
- Steel capacity should be reduced by 30 million tonnes in 2018 and no new steel capacity projects should be launched.
- There is a need to facilitate the permanent shutdown of zombie steel companies
- The following steel capacities should be forcibly shut down and excluded from the market:
o Steel mills that have not obtained a Discharge Permit, or the Permit has been obtained, but their pollutants emission level is far below the national standard
o When the quality of steel products does not meet the national standard and it is not possible to eliminate the gap in six months. 
o The energy intensity of the steelmaking process is higher than the national standard and it is not possible to eliminate the gap by a certain deadline.
o The facilities are not compliant with the safety standard issued by the local safety authority and serious safety risks are not eliminated. 
- Need to prevent closed steel capacities from restarting production, including both the obsolete ground bar steel capacities and those modern but closed excess capacities. An on-site inspection and review for the closed ground bar steel capacities will be organized in some selected provinces in May and June. 
- Public tip-offs on the restarting of closed steel capacities are encouraged. 
- Remote sensing technology with satellites will be used to monitor closed steel capacities.
- Need to push forward industry consolidation: trans-regional and cross-ownership mergers and acquisitions will be supported. 
- Steel mills that build large scale scrap recycling facilities will be supported. 
- Steel mills that replace some of their BF-BOF processes with EAF processes will be supported, on the condition that this does not lead to any capacity increase.
As a result of the control over new added steel production capacity in the country, some steelmakers in China have shifted their investments to the emerging steel markets like ASEAN countries. 
Among the ASEAN countries, Indonesia and Malaysia are the prime investment destinations. 
Shaanxi Iron and Steel (Shaagang) recently announced its plan to build more than 10 million per year steel-making capacity in Indonesia. The projects would be separated into two different phases, the first one is a 7.5 million tonnes steelworks at Jambi Industrial Park, Indonesia. It is targeted that the production could replace the 12 million tonnes per year of steel that Indonesia currently imports. The second phase would be a 3 million tonnes per year steelworks to produce construction longs. 
Another Chinse company, Xinxing Ductile Iron Pipe is going to invest in its second-stage expansion of ferronickel smelting joint venture on Obi Island in North Maluku, Indonesia, after the successful first stage production of 190,000 tonnes per year by the end of 2017. It is targeted that the new capacity in the second stage of another 570,000 tonnes per year production of ferronickel would well serve the strong demand from China’s stainless producers. 
China’s steelmaker, Delong Holdings is planning to set up a joint venture to build and operate a 3.5 million tonnes per year stainless steel plant in Indonesia. It is a joint venture between Delong Holdings and Dexin Steel Indonesia. The stainless plant will be built at Tshingshan Park in Morowali, on the island of Sulawesi, Indonesia. 
In Malaysia, Chinese state-owned company, Guangxi Beibu Gulf Port International Group and the privately-owned Guangxi ShengLong Metallurgical Co., Ltd. are on track with their plan to set up a joint venture plant in Kuantan, Malaysia under the name “Alliance Steel” to produce 3.5 million tonnes per year of high-carbon wire rod, bar and H-beam products. The company commissioned a steel bar production line with a capacity of 1.4 million tonnes per year in late December 2017 and ignited its No.1 blast furnace at the end of March 2018.  

In addition, China’s Hebei Xin WuAn Steel Group and China Metallurgical Group Corp (MCC) also indicated their intention to jointly invest in Malaysia’s eastern state of Sarawak by signing a memorandum of understanding with the Malaysian government. The project aims to set up a steelwork, which comprises of a 5 million tonnes per year steel plant, a 3 million tonnes per year cement plant and a 2 million tonnes per year coking plant, a million tonnes per year cold rolling mill and a million tonnes per year welded pipe plant. 

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