China proposed a more stringent version of its steel capacity swap program on October 24, aimed at curbing overcapacity in the world's largest steel industry and promoting cleaner manufacturing.

The proposed rules, issued by the Ministry of Industry and Information Technology, bar new steel capacity additions outside of approved industrial parks of the Yangtze River economic belt, as well as the addition of capacity in key regions, which include the Beijing-Tianjin-Hebei area, the Yangtze River Delta, and the Fenwei Plain.

In addition, new rules also strictly forbid the transfer of steel capacity from non-key to key regions or between key regions.

Provinces and cities with national steel capacity control targets are not permitted to accept capacity transferred from other regions.

The proposed rules also raise the minimum replacement ratios, requiring at least 1.5 tonnes of old capacity to be decommissioned for every tonne added.

The previous program, which was paused in August 2024, required steel mills to cut old capacity equal to new capacity additions. However, this policy was criticized for failing to prevent excessive expansion and exacerbating the supply glut.

The new rules aim to encourage a shift towards more sustainable production methods, focusing on the use of scrap steel and electric-arc furnaces.

The plan seeks to address long-standing issues of overproduction, which have plagued the industry amid falling domestic demand following China's ongoing property market crisis.

The overcapacity led to a supply-demand imbalance, weakening margins and spurring record steel exports from China.

Since 2024, multiple countries and regions launched anti-dumping investigations and measures against Chinese steel exports. The European Union (EU) launched an anti-dumping investigation into Chinese cold- and hot-rolled steel exports in January 2024, following complaints from European steelmakers about unfair pricing practices.

In February last year, the Indian government initiated new investigations into Chinese exports of stainless steel and alloy steel. This came after industry reports suggesting that Chinese steel was being sold in India at prices well below domestic production costs, negatively impacting local producers.

However, analysts remained skeptical about the plan's effectiveness, with some arguing that the decommissioning of older capacity will be slow and not aligned with declining demand.