Beijing has for years operated a system in which companies can build steel plants on the condition that they remove set amounts of existing, older capacity.
Those rules will no longer apply from Friday and the government will develop an alternative programme, the ministry of industry and information technology said in a statement.
There have been growing calls for action from the Chinese authorities in recent months as steel prices plunged amid a worsening glut. Demand has fallen more than 10% since 2020, and many analysts say the industry will need to shrink to fit an economy that’s becoming less reliant on steel-intensive construction.
Chinese steel exports have ballooned this year to their highest since 2016, a sign that mills are struggling to find domestic markets for about 1 billion tonnes a year of output.
“The supply and demand relationship in the steel industry is facing new challenges,” the ministry said in the statement. “There are still problems such as inadequate policy implementation, imperfect supervision and implementation mechanisms, and incompatibility with the industry’s development situation and needs.”
China’s steel-industry woes have deepened in recent months, and last week the head of China Baowu Steel Group Corp, the world’s biggest producer, warned the industry faced a situation worse than the crises it endured in 2008 and 2015.
Beijing first introduced so-called “capacity swaps” for heavy industries including steel in the middle of last decade, as the government began to tackle untrammeled expansion.
Under the latest rules introduced three years ago, each tonne of annual steel capacity added in environmentally sensitive areas had to be matched by the closure of 1.5 tonnes of existing capacity, or by 1.25 tonnes in all other areas.
But there were also significant exceptions, largely designed to encourage “electric arc furnace” plants that rely on scrap — rather than the coal-fired blast furnaces that dominate China’s industry.
“The capacity swap programme has actually led to growth, as mills often opted to demolish outdated plants for bigger ones,” said He Jianhui, an analyst at SDIC Essence Futures Co.
“Now that the whole industry demand is clearly declining, overcapacity is becoming more and more serious, and this document from the ministry is sending a signal of control.”
Iron ore prices have fallen as the dire situation facing Chinese steelmakers became more apparent in recent weeks. They’ve lost 10% so far this quarter and touched the lowest since 2022 last week.
Futures in Singapore dropped 1.2% to US$96.20 a tonne on Friday, paring a weekly rebound.