In China as well, as in the majority of mature
economies, the steel industry represented one of the most dynamic industries in
the years of industrialisation. The reason is simple: on the one hand, the
expansion of infrastructural investments, the development of the manufacturing
sector and the urbanisation of increasingly extensive groups of people ensured
to the demand for steel seemingly endless development opportunities; on the
other, the construction of steel plants (chiefly in public ownership) acted as
a catalyst for regional employment in economically depressed areas and a
panacea for the revenue income of provincial councils.
However, in more recent years the situation in Beijing has gradually got out of hand. The ease of access to credit, the search for public consensus and the lack of internal coordination have lead local councils to foster increasingly ambitious plans for the expansion of the facilities, without the central Government - announcements aside - being able to tangibly curtail the gargantuan nature of the sector under scrutiny. Thus, the latter has undergone an uncontrollable development: the Chinese steel industry currently counts 1.2 billion tons in annual supply capacity, almost twice compared to the installed base for 2008. In 2015, production barely exceeded 800 million tons.
Such figures only emphasise the current weakness of the Chinese steel industry. As long as the domestic demand for steel kept growing, the bright prospects for development concealed any difficulty. The absence of a valid driving force, apart from constructions, was nevertheless bound, sooner or later, to pay for the overinvestment carried out in the boom years Between 2014 and 2015, in step with the bursting of the housing bubble, the prices for steel dropped dramatically, opening up a bottomless pit in the balance sheets of the steelworks. [fig. 1]
Due to the shrinking domestic demand, all that remained for the latter was to seek an outlet outside the domestic market: in order to gain shares on close and distant markets the choice was made to drastically cut its price lists [fig. 2]. A desperate but necessary  choice. In fact, the steel industry is characterised by considerable economies of scale, that result in the optimisation of activity levels so as to contain the average production costs: this relation is even more stringent for Chinese blast furnaces, for the most part recently created, therefore requiring liquidity to sustain ordinary management, but also to repay the high funds mobilised for their construction.
After doubling in 2014, Chinese steel exports in
2015 increased in volume by a further 20%, sustaining the cash flow position of
the businesses and enabling the latter to keep open the credit lines with the
funders. For the time being, the ones on the receiving end are the competitors
on the principal markets, including the Italian one [fig. 3], that overshadowed
by the Chinese advance have decreased their export quotas. However, in the end
China itself will pay the highest price.
In the absence of driving force stemming from the domestic demand, the sole feasible strategy for restoring the balance of the Chinese steel market necessarily implies the demolition of excess capacity. Exporting below cost is far from sustainable in the long run (suffice to mention the protests from the principal steel producers, such as the one taking place recently in Brussels , and the spate of protectionist trade measures already imposed by other Countries in the past few months). In the short term, this also failed to prevent a further drop in the level of utilisation of the plants, with the Chinese steel industry in 2015 experiencing the first loss of production in 25 years.
The central Government would appear to support the first solution, by recently promising a reduction by 100-150 million tons of capacity. Nevertheless, it is doubtful whether these words may be followed by actual facts.
In fact, closing down a steel plant is expensive in economic and political terms alike. On the one hand, the termination of the activity of a blast furnace implies the write-off of receivables no longer collectable from the balance sheets of the banking institutions financing it: on a scale of 150 million tons , the risk that the cutback in the lines of funding provided to the steel industry may trigger a domino effect on the banking system - now that Beijing is striving to curb the outflow of capital from China - is not negligible. And not only that. This prospect also entails far-reaching implications from a social angle: based on the estimated average output per operator, a reduction by 150 million tons of production capacity would be tantamount to eliminating approximately half a million jobs. Given that, on average, to each worker in this sector correspond 2-3 other jobs in the ancillary industry, the approximate figure of 1.5 million people that should be reassigned in an economy undergoing a structural slowdown is reached.
If to the steel industry are added the other sectors plagued by overcapacity and poor profitability, such as the mining, cement or construction industries, what emerges is certainly not a favourable climate for the implementation of radical measures. It is doubted that Chinese authorities are motivated to force the closure of such a high number of industries, aside from bearing the systemic risk, also taking on the risk of creating substantial pockets of unemployment, at a time when the Chinese social fabric appears to be coming apart at the seams as rarely before. Glossing over the "official" unemployment rate, in order to fully grasp the mounting social tension in China it suffices to monitor the map of strikes, the number of which doubled in 2015, intensifying relentlessly in more recent months [fig. 4].
The first solution, namely to keep the loss-making production facilities afloat, even if the mass of non-performing loans is further increased for the banking institutions financing them, seems more likely. Hence, it could be expected that Beijing will keep postponing the resolution of the problem to the greatest extent possible, so as to avoid further burdening a supremely weak societal framework. At the price, however, of ceaselessly continuing to flood the international markets with low-cost steel, lowering the international price lists and taking away increasingly larger quotas from foreign competitors; with the more than real risk of facing, within the not too distant future, a mass of bad debt by now too significant to be managed in an orderly way.