“In 2015, after a sharp decline, China's steel prices experienced weak fluctuations and adjustments. The phenomenon of cost and price inversion has not fundamentally changed, benefits continue to decline, losses continue to widen, construction projects stagnate, production and operations are difficult, and the situation is very severe.” Lei Pingxi, Executive Vice President of the China Metallurgical Mining Enterprises Association, made the above statement at a public occasion recently.
      Industry insiders predict that in 2016, China's steel industry will face many difficulties and pressures. Although the demand market will be somewhat boosted, overcapacity remains severe, and the overall contradiction of oversupply is difficult to reverse. This must be fully recognized.
      Overcapacity is the main cause
      In 2015, the growth rate of major downstream industries of China's steel industry slowed down, steel consumption was limited, and steel output declined for the first time in 35 years. Steel enterprises have reduced production, suspended production, and even some enterprises went bankrupt. The steel industry has encountered a real winter. The macro background of the steel industry's decline from prosperity is that national economic growth has shifted from high speed to medium-high speed, leading to shrinking steel demand. Since 2015, China's economy has entered a stage of slow decline, and the “three carriages” have decelerated one after another, directly affecting terminal industries. With the continued deep adjustment of the global economy, China's economy is under huge downward pressure, fixed asset investment growth has dropped significantly, the growth rate of steel-using industries continues to fall, and steel market demand is not strong.
　　The development of the steel industry is strongly correlated with national infrastructure construction and industrial development speed. Due to the slowdown in China's steel demand and the lack of a sufficiently large market to offset the impact of China's market stagnation, the situation of oversupply is becoming more and more obvious.
      In fact, China's economic development is plagued by overcapacity, the most typical of which is the steel industry. It can be said that overcapacity is an important reason for the steel industry's downturn. Among them, steel overcapacity mainly has the following four reasons: First, in the early years, China's urbanization and industrialization were in a period of rapid development, which constituted the basic driving force for the rapid expansion of steel capacity. Second, in the process of China's economic growth, although the transition from extensive growth to intensive growth was proposed long ago, this process has never been completely completed. In the past, steel capacity expansion matched extensive growth. Once steel demand changes periodically, the problem of overcapacity will inevitably be exposed. Third, under the influence of local protectionism and the failure of overall capacity planning, a considerable part of so-called “unstatistical capacity” has been generated, aggravating the overcapacity problem. Fourth, steel “zombie” enterprises are unwilling to exit production, playing a certain role.
      In various overcapacity industries in China, including the steel industry, overcapacity is only a surface phenomenon. The essence hidden behind it is the serious problem of product homogenization. Therefore, the exit of overcapacity is not just the end of enterprise production suspension, reduction, or even closure, but to find the root cause, eliminate abuses, and face the future. In fact, China's steel industry has been limiting production for many years, but the effect is not obvious. Since 2008, although the government has successively introduced a series of policies to resolve the contradiction of outdated capacity, one of the reasons why it has never been effective is the concern that the concentrated release of overcapacity will be risky.
       Transformation is imminent
       At present, China's national economy is operating within a reasonable range, but there is still downward pressure. The driving force for China's steel demand growth is weakening, leading the steel industry into difficulties. The industry's loss ratio is about 50%, and the debt ratio is about 70%. The overall production and operation situation of the domestic steel industry is severe, and the industry's transformation and development is imminent. From the analysis of various characteristics of the steel industry, including output, demand, varieties, structure, etc., the overall judgment is that the life cycle of China's steel industry is in the late growth stage, in a consolidation period from growth to maturity, and the steel industry reform has entered a deep-water zone.
      At present, the downturn in the steel industry is a correction to the previous extensive development. Currently, China's steel industry is accelerating transformation and upgrading, enterprise integration has been initiated, energy conservation and environmental protection have greatly improved, steel exports have increased significantly, and steel e-commerce is developing rapidly. However, the best way to resolve overcapacity is to accelerate the cultivation of alternative industries. In the process of industry reform and enterprise transformation, leading enterprises should actively seek breakthroughs to make their competitiveness more prominent. First, reduce costs, re-evaluate the entire steel industry chain, remove unnecessary costs, and focus on both large and small; second, adjust product structure and focus on product differentiation; third, build sales channels and cultivate dependent customers in the steel industry; fourth, change the production organization model from plan-guided to market-guided; fifth, seek exports; sixth, strictly control funds and raise risk awareness.
      2016 is a key year for China's steel industry to get out of trouble. Therefore, senior industry insiders suggest that the state should continue to introduce relevant support policies for the steel industry in energy conservation and emission reduction, intelligent manufacturing, and internationalization strategies. At the same time, the steel industry itself needs to improve the market mechanism, accelerate industrial transformation and upgrading, and create a new industry ecosystem with orderly competition and benign interaction. China's steel industry needs to adapt to the new normal as soon as possible, truly embark on a path that conforms to reality and adheres to scientific development, and needs innovative concepts and technologies to achieve transformation and upgrading. Steel enterprises should focus on institutional reform, structural optimization, and factor upgrading, especially strive to implement technological innovation, improve total factor productivity, and actively seek new market space to resolve overcapacity.