Recently, the Ministry of Industry and Information Technology (MIIT) released the first batch of enterprises in 15 major industries to be phased out for outdated and excess capacity in 2014. The list involves 44 ironmaking enterprises and 30 steelmaking enterprises, with a total of 46.861 million tons of outdated and excess capacity in the steel industry to be eliminated.

On this phase-out list, production lines of five steel enterprises, including Hebei Iron and Steel, Xinxing Ductile Iron Pipes, Shagang, and Magang (Hefei) Iron and Steel, are all included.

In response, Xu Xiangchun, an analyst at "Mysteel," said in an interview with a Securities Daily reporter that the biggest highlight of the list released by the MIIT this time is that outdated capacity and excess capacity are being phased out simultaneously. "This is a good stimulus for solving the current severe overcapacity in China's steel industry, and it is also the beginning of the steel industry's self-redemption."

Two-Pronged Approach: Industry Reshuffling Underway

In this year's first batch of steel enterprises to be phased out for outdated and excess capacity, a total of six production lines from five listed companies are on the list. In terms of ironmaking capacity, Hebei Iron and Steel Group Jinding Heavy Industry Co., Ltd. will phase out two 228-cubic-meter blast furnaces, involving a capacity of 530,000 tons; Magang (Hefei) Iron and Steel Co., Ltd. will phase out two 405-cubic-meter blast furnaces and two 420-cubic-meter blast furnaces, involving a capacity of 1.6 million tons; Wuhu Xinxing Ductile Iron Pipes Co., Ltd. will phase out one 360-cubic-meter blast furnace, involving a capacity of 440,000 tons; and Baosteel Group Xinjiang Bayi Iron and Steel Co., Ltd. will phase out two 430-cubic-meter blast furnaces, involving a capacity of 1 million tons.

It is worth noting that in this year's first batch of steel industry capacity phase-outs, the ironmaking phase-out volume reached 25.406 million tons, more than 6 million tons above the annual task set by the MIIT. The steelmaking capacity phase-out volume was 21.455 million tons, already completing 74.8% of the annual phase-out target.

In Xu Xiangchun's view, the state has adopted a "two-pronged" approach to carry out a large-scale reshuffle of the steel industry. "The state's phase-out targets this time are more detailed. It not only resolutely phases out outdated capacity but is equally uncompromising in phasing out excess capacity."

Xu Xiangchun also told the reporter, "Blast furnaces below 400 cubic meters among steel enterprises belong to outdated capacity; this is the criterion for judging whether a steel enterprise has outdated capacity. Among the steel enterprises phased out this time, some have blast furnaces of 400 cubic meters or above. The reason these steel enterprises are on the list is that their overcapacity problem is serious."

Higher Costs Add Pressure: Growing Pains Unavoidable

The notice issued by the MIIT also requires that relevant provinces (autonomous regions and municipalities) take effective measures and strive to shut down the production lines (equipment) of enterprises included in the announced list before the end of September 2014, ensuring that they are completely dismantled and phased out before the end of 2014 and are not transferred to other regions.

"Solving the overcapacity problem in the steel industry requires both market-based means for adjustment and mandatory laws and regulations for standardization. Some steel enterprises with poor competitiveness and serious pollution are bound to be eliminated by the industry," Xu Xiangchun said.

In the view of Zhang Lin, an analyst at Lange Steel Network, "The government now requires enterprises to meet emission standards or upgrade process equipment and dust removal equipment, which increases enterprises' purchase costs for equipment and the future operating costs of environmental protection devices. Although increasing costs is not a good thing for steel enterprises, it is something that must be done. After all, only by clearing out outdated capacity and upgrading equipment can the comprehensive competitiveness of China's entire steel industry be improved. In short, the growing pains brought by phasing out outdated and excess capacity are unavoidable." Zhang Lin said.