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(Bloomberg) — China’s billion-ton steel industry is edging toward its biggest shake-up in a decade, with speculation growing that Beijing will order plant closures in response to a construction slowdown at home and a wave of protectionism overseas.

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The world’s biggest steel market has been abuzz this week with speculation that Beijing will mandate capacity cuts of 50 million tons — possibly as early as a key political gathering in the capital next week. An unverified screenshot implying that a plan had been approved went viral among steel-watchers on China’s ubiquitious WeChat messaging app, stoking gains for steel prices and steelmakers.

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No plans have been announced, but the widespread speculation reflect broad recognition that the struggling steel industry needs a fresh overhaul, nearly a decade after President Xi Jinping launched his first supply-side reforms. The country’s chronic property crisis has sent domestic steel demand falling for the past four years. 

The international environment has also turned more treacherous, as nations move to block China’s export flood that topped 110 million tons of steel last year and encouraged US President Donald Trump’s tough line on metals tariffs. That’s piling pressure on China’s leaders.

“We understand the policy stance on steel has changed at the Politburo level and more actions will follow to reduce supply,” Jack Shang, a Citigroup Inc. analyst wrote in a research note. “It’s time for a supply reform 2.0,” he wrote. The bank predicts a supply cut of around 50 million tons. 

More Severe

China dominates global steel production, and its exports have fueled bouts of trade tensions over the past two decades. A previous round of government-backed reforms were unveiled by Xi in 2016, in the wake of a previous demand crash and export surge. During that round of reforms, 150 million tons of capacity cuts were made over three years.

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Trump argued that his blanket 25% tariffs against steel imports were necessary to protect American industry against China-fueled oversupply in the rest of the world. South Korea and Vietnam — both crucial markets — slapped tariffs on Chinese steel, while India is mulling tougher measures and the European Union is revamping its safeguards.

“The export situation facing China’s steel industry will become more severe,” the China Metallurgical Industry Planning and Research Institute, which provides guidance to the government, said in a note. More than 30 new trade cases were launched against Chinese steel in 2024, it said, higher than the total of the previous four years.

Overcapacity is an issue across a swathe of Chinese industries, including newer sectors like solar panels or batteries. But, unlike those, steel is facing a long-term demand decline, and the strong role played by state-owned producers means government intervention may be needed to shutter mills.

Rat Race

The sector was in the red for most of 2024, with debt climbing to record highs and a record number of companies turning losses. Patches of growing demand — including manufacturing, green infrastructure and shipbuilding — aren’t enough to pick up the slack.

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All eyes are now on China’s annual National People’s Congress legislative meetings next week, to see if any guidance is issued for the steel industry. This is the final year of China’s current Five-Year Plan, and the country would need to cut 150 million tons of coal-fired blast furnace capacity to meet its climate targets, according to the Centre for Research on Energy and Clean Air.

Citi said new measures would tackle “rat-race” competition in the industry and alleviate looming geopolitical risks. Industry giants including China Baowu Steel Group Corp. and Ansteel Group Corp. would benefit from the elimination of weaker competitors.

“China’s supply-side reforms have always targeted smaller, less efficient companies,” said Sabrin Chowdhury, head of commodities at BMI. “This also works to consolidate the industry and benefit the larger, more efficient state-owned enterprises,” she said.

—With assistance from Winnie Zhu.

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