Yesterday, the Hubei Provincial Development and Reform Commission took the lead in publicly announcing steel projects built since 2005. A relevant official from the Hubei Provincial DRC said this was a major cleanup of non-compliant steel projects carried out in accordance with the spirit of the National Development and Reform Commission's "steel project cleanup and rectification." According to requirements, each province must publicly announce its local cleanup results for ten days, then report to the National Development and Reform Commission by the end of June, and wait for unified arrangements.

In this cleanup and rectification, the National Development and Reform Commission required that projects that started construction before 2005 or obtained approval documents from local investment authorities be handled at local discretion; projects that started construction after 2005 and were completed before May 10, 2013 be reported to relevant national ministries and commissions for the record; and non-compliant projects under construction that were not completed before May 10, 2013 be reported to the state for recognition in accordance with current industrial policy.

An official from the Hubei Provincial DRC said the purpose of the National Development and Reform Commission's cleanup and rectification was to establish an information database for the steel industry and provide an important basis for future formulation of policies on steel industry macro-control, project approval, capacity replacement, and energy consumption and environmental protection management.

In October 2013, the State Council issued the "Guiding Opinions on Resolving Serious Contradictions of Overcapacity," which listed steel, cement, electrolytic aluminum, flat glass, and shipbuilding as industries with serious overcapacity. To resolve overcapacity in the steel industry, it is impossible to avoid the large number of projects built without approval after 2005. Industry estimates suggest that 60% to 70% of existing steel capacity has not been approved by the state.

"This cleanup and rectification has a clear statement: it will not pursue retroactive punishment for capacity that is an established fact; moreover, it will provide a way out. That is, regardless of whether the state has approved it or not, you will be given a legal identity," the official said. This is a practical approach, because steel projects involve large investments and many are state-owned enterprises; forced shutdowns would cause major losses.

The official stance emboldened local governments. Yesterday, Hubei Province published the "Information on Completed Non-compliant Steel Capacity Submitted for the Record" and the "Information on Non-compliant Steel Projects Under Construction Submitted for Recognition." The materials show that Hubei has suspended construction of six non-compliant steel projects under construction, with a total steel capacity of 16.04 million tons, of which five projects involve capacity replacement. At the end of July 2014, the "Hubei Province Steel Industry Structural Adjustment Plan" will be submitted to the National Development and Reform Commission for evaluation. If the capacity replacement plans for these non-compliant steel projects under construction comply with procedures and are approved by the state, they may still be expected to resume construction.

This cleanup and rectification of non-compliant steel projects is nationwide and has far-reaching effects. An analyst said that according to regulations, for completed non-compliant projects submitted for the record, if they fail to meet indicators such as equipment scale, energy consumption, and pollutant discharge, rectification will be implemented; those that do not meet rectification standards will be subject to differentiated price policies such as differentiated electricity prices, punitive electricity prices, and differentiated water prices; for completed non-compliant projects not submitted for the record, differentiated price policies such as differentiated electricity prices, punitive electricity prices, and differentiated water prices will be directly implemented, and they will be included in the annual task of eliminating outdated capacity. With the implementation of differentiated price policies, production costs for steel enterprises that do not meet standards will increase, suppressing their capacity release.

Falling steel prices have also helped drive industry capacity elimination. In 2014, new steel capacity dropped significantly. However, industry insiders expect that resolving steel overcapacity remains a long and arduous task, and it is estimated that returning to a reasonable range will take at least three years.