On April 4th, the National Development and Reform Commission announced that, in order to implement the decisions and deployments of the Party Central Committee and the State Council, and to continuously consolidate and enhance the achievements of supply-side structural reform, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Ecology and Environment, the Ministry of Emergency Management, and the National Bureau of Statistics will continue to carry out nationwide crude steel production control work in 2024. The focus will be on energy conservation and carbon reduction, with differentiated measures, balancing preservation and pressure, categorized guidance, and support for superior enterprises while phasing out inferior ones. This aims to promote the optimization of the steel industry's structure and facilitate its high-quality development. Additionally, to support capacity and production control efforts, relevant departments will conduct a comprehensive survey of basic equipment information for steel smelting enterprises nationwide.

The release of this announcement quickly spread throughout the steel industry. The long-awaited news on crude steel production control seemed to dispel the gloom that had shrouded the industry since the beginning of the year, especially following the Spring Festival holiday.

Since the beginning of this year, factors such as insufficient effective demand and delayed demand recovery after the Spring Festival have caused steel market prices to decline continuously. For instance, the price of rebar plummeted from around 4000 yuan/ton at the beginning of the year to around 3400 yuan/ton at its lowest point, representing a drop of over 15%. As a result, the operational risks and capital risks of entities along the steel industry chain have sharply increased. The release of this year's "production control" message by relevant state departments is undoubtedly aimed at stabilizing market expectations and reducing the possibility of systemic risks.

This marks the fourth consecutive year that relevant state departments have implemented crude steel production control policies since 2021. As with previous times, the release of crude steel production control measures always attracts widespread attention and sparks various opinions, primarily focusing on the necessity of continuing crude steel production control policies. This year's discussions seem particularly intense.

Some believe that, as the steel industry enters a downturn, the survival and elimination of enterprises should be determined by the market, with the survival of the fittest. They argue that the government should intervene less or not at all, allowing truly competitive enterprises to thrive. Let's call this the "market-oriented" perspective. In contrast, others argue that, in the current stage, the government should instead intensify its intervention in industry governance, create a fair competition environment, avoid inferior products driving out superior ones, and enhance the competitiveness of China's steel industry. Let's call this the "government-oriented" perspective.

Looking back on the development of the steel industry in recent years, under the strong impetus of marketization, China's steel industry has greatly satisfied the requirements of national economic development, achieving leaps in both quantity and quality contributions. However, during this rapid development, the industry has also faced issues such as extensive growth, disorderly competition, and long-term low profit margins, primarily due to inadequate market incentives, inefficient factor mobility, and low resource allocation efficiency.

Therefore, I believe that both the government and the market, as two basic methods of resource allocation, are indispensable in the industrial development process. Especially now, facing a more complex domestic and international environment, the government's "visible hand" needs to play a greater role to better promote the formation of effective market mechanisms.

As mentioned earlier, the appearance of both the "government-oriented" and "market-oriented" perspectives on crude steel production control policies is mainly due to differences in the interests and demands of relevant parties holding these views. The "market-oriented" perspective believes that, based on past experience, production control in the same regional market is essentially a "one-size-fits-all" approach. This could result in less competitive enterprises also benefiting from the post-control dividends, surviving through luck until the next cycle.

I believe that marketization is simply a means to optimize resource allocation and promote economic development, not our ultimate goal. The premise of marketization is that its role can be effectively played, depending on a fair market environment. The question is, is the current market environment for the steel industry really fair? Are the competitive steel enterprises that claim to have confidence in fighting their way through the harsh current market environment truly relying solely on benign internal mechanisms for their competitiveness? Take, for example, financing costs for enterprises. State-owned steel enterprises generally find it much easier to apply for bank loans or issue bonds compared to private enterprises, with financing costs often lower by six or seven percentage points for state-owned enterprises. Can this "inherent advantage" also be considered part of the competitiveness of state-owned steel enterprises? Furthermore, in terms of environmental protection investment, the current environmental governance investment, including ultra-low emission transformation, implemented by southern steel enterprises is far lower than that of northern steel enterprises, especially in key areas such as the Beijing-Tianjin-Hebei region. According to research and calculations by relevant departments, the environmental investment per ton of steel in the north and south differs by more than 300 yuan, and the operating costs differ by more than 100 yuan, representing actual costs that affect the profitability of enterprises. Can we say that northern steel enterprises are weaker than southern steel enterprises due to this inherent unfairness? It is evident that this inherent unfairness already exists. Advocating for complete marketization to fight it out would only exacerbate this inequality, resulting in the expulsion of good companies by bad ones and a complete failure of market mechanisms.

Therefore, I believe that, at least until a fair market environment is achieved, the views advocating complete marketization are fundamentally untenable.

The report of the 20th Party Congress pointed out the need to give full play to the decisive role of the market in resource allocation and to better utilize the government's role. In essence, it means that the market must be effective, and the government must be proactive. The steel industry is facing unprecedented multiple pressures, constrained by various factors, and industrial transformation and upgrading are imperative. Every step taken now is crucial, as it affects whether China can continue to maintain its advantageous position in the steel industry.

To better utilize the proactive role of the government, precise policymaking and implementation are required. From the announcement already released by the National Development and Reform Commission, the principles of the crude steel production control policy, including "differentiated measures, balancing preservation and pressure, categorized guidance, and support for superior enterprises while phasing out inferior ones," reflect the principles of this crude steel production control policy and indirectly indicate that government departments will pay more attention to precise control when formulating industrial policies. This severely tests the government's "proactive" patience and wisdom. The prerequisite for ensuring the above principles is to have a comprehensive and accurate understanding of the basic situation of steel production enterprises nationwide. Considering the effectiveness of previous crude steel production control measures, equipment surveying before formally implementing production control policies is the most important task. It is crucial for the success of this control policy and for the effective functioning of the market.

To better utilize the proactive role of the government, it is necessary to keep pace with the times, implement dynamic and flexible strategies. The formulation and implementation of any industrial policy must grasp the "timing, degree, and momentum." The so-called "timing" refers to seizing the timing of policy release, "degree" refers to considering how far the government's reach extends and managing the relationship with the market, and "momentum" refers to serving the overall national development strategy and direction, and acting accordingly. For the steel industry, the establishment of a new capacity governance mechanism is currently a crucial task. Since the introduction of capacity replacement in 2015, it has played a crucial role in regulating industry capacity in conjunction with the supply-side structural reform of the steel industry. However, since 2020, when the steel industry entered a substantial downturn in demand, the original capacity replacement policy, especially its trading of relevant replaced capacity indicators, has hindered the proactive withdrawal and clearance of some less competitive enterprises, further exacerbating industry overcapacity, which is not conducive to the sustainable and healthy development of the industry. Therefore, some industrial policies should keep pace with the times and be implemented flexibly according to new industry conditions and trends.

To better utilize the proactive role of the government, it is necessary to accelerate the construction of a unified national market. The reason why market mechanisms often fail is often due to problems in the market environment, which require the "visible hand" of the government to intervene. From the perspective of creating a fair and effective market environment, promoting the construction of a unified national market is crucial for the healthy development of the steel industry. As mentioned earlier, there are many obstacles to cross-regional factor resource circulation in the current steel industry, such as differences in financing costs, energy consumption requirements, and environmental capacity requirements between different regions, which have invisibly caused regional unfairness. On the one hand, this is not conducive to internal industry mergers and acquisitions, and on the other hand, it is not conducive to the effective implementation of industrial policies issued by industry regulatory authorities. Based on the cross-regional capacity replacement in the steel industry in recent years and the merger and reorganization of key steel enterprises, the lack of smooth cross-regional resource circulation is an important factor affecting the enthusiasm for industry mergers and acquisitions. Therefore, the construction of a unified national market needs to be accelerated.

Source from CSteelNews