Overcapacity

Background

For many decades, governments around the world have intervened in the steel industry to ensure their country has and retains large amounts of steel capacity. Such interventions include plant ownership, the provision of low-interest loans, grants, tax benefits, free allocations in carbon pricing schemes, and large subsidies.^[1] Even though such interventions effectively caused the fast growth of steel capacity, the growth was not market-based. Therefore, the global supply now significantly exceeds the global demand, a phenomenon called “overcapacity”.^[1] With an estimated current global overcapacity of 25% and growing, many steel plants are only operating at low capacity levels, as evidenced by the 72% average capacity levels of the top ten steel producers.^[2] Such low operation levels risk the viability of a steel plant: To remain profitable, steel plants need to operate at 80-90% average capacity.^[3] The current state thus results in economic losses from reduced profits.

2021 overcapacity in the top steel-producing countries. Source: Swalec, 2022.

The steel industry is highly globalized, and overcapacity causes international trade friction and economic inefficiency. China is one example of extraordinary amounts of government intervention and ownership of steel plants. The country has created so much excess capacity that it dumps very cheap steel in other markets around the world. This practice has made it difficult for some local plants to compete, causing economic losses or even bankruptcy.^[4]

The reduced profitability encumbers the industry’s decarbonization potential by making it more difficult for plant owners to afford new investments in low-emissions steel infrastructure and technologies that drive green steel innovation.^[4] While overcapacity may prove to be a challenge to steel decarbonization, it also provides an opportunity to support the transition as higher-emissions steel capacity can be closed immediately, without affecting overall supply and demand.^[1]^[3]

Policy Action

Policy targets to reduce government intervention and excess capacity include:^[5]

Analyze national steel capacity, steel demand, and government interventions in the steel market to identify overcapacity, inefficient plants, and nonconstructive government practices.^[1]
Create strategies to deal with existing excess capacity, e.g., mandate closures of underutilized and inefficient plants or prohibit reinvestments. This requires collaboration with financial stakeholders and steel producers.
Eliminate public sector financial assistance to carbon-intensive steel production, including the construction and maintenance of existing BF-BOF plants, export credits, or free allowances in carbon schemes.^[1]^[6]
Stop government interventions in raw material markets, as well as industrial planning and decision-making.^[1]
Reduce import tariffs and trade barriers, as well as barriers to exiting the steel industry.^[1]
Under conditions where overcapacity is deemed important, require a switch to EAF production, which can be switched off during times of underutilization, in contrast to BF-BOF plants. This will also reduce stranded assets.^[7]
Design and implement an international agreement to reduce or eliminate steel subsidies and tariffs, as well as other government interventions to prevent future market distortions.^[1] This could be done in collaboration with the Global Forum on Steel Excess Capacity (GFSEC).^[3]