
Earlier in 2017, China’s central government released a policy to control pollution in Beijing, Tianjin and 26 cities in the surrounding region during the winter. Known as the ‘2+26’ policy, it will implement strict production restrictions for polluting industries, including the steel industry, which lasts from mid-November 2017 to mid-March 2018. This policy was set up hastily to meet aggressive environmental targets to reduce the concentration of fine particulate matter (PM2.5) by 25% by 2017 in the Beijing-Tianjin-Hebei region, which was set up in the air pollution prevention and control action plan (APPCAP).
In October, many of the restrictions outlined in the policy have taken effect. Steel companies must cap their utilization rates at 50% in Tangshan, Handan, Anyang, and Shijiazhuang. We have noticed that stricter measures are implemented at a more local level. Some areas will implement even tougher or longer-lasting restrictions than what the 2+26 policy outlines. For example, in Tangshan, the production restriction started a month early on 12 October. Some cities outside the 2+26 region will also implement similar production restrictions. For example, Xuzhou will restrict production by about 30% and Linfen will also restrict production.
As a result of this policy, output restrictions will cause losses in hot metal supply of about 14.2 Mt and 20.2 Mt in Q4 2017 and Q1 2018, respectively, meaning that hot metal supply could be curtailed by 34 Mt this winter. However, the loss will be partly offset by production hikes from capacity outside the 2+26 region – two-thirds of hot metal capacity sits outside the restricted region. To make up for the loss in hot metal, steel companies can feed more scrap or ramp up electric-arc furnaces, which will further offset the loss on the steel supply. The actual steel curtailment will be about 4 Mt in Q4 2017.
The flip side of the 2+26 policy is that it will also impact steel demand. We estimate steel demand will be hit even harder than steel supply. This is because construction has been stopped in Beijing, Tianjin and Hebei province. Some downstream sectors will be also severely restricted. We estimate that it will reduce demand by 9.6 Mt in Q4 2007. This is no way to offset the demand impact as what the steel industry can provide on steel production. This will put downward pressures on the steel price during the winter.