I. Why is it necessary to revise the Implementation Measures for Capacity Replacement in the Iron and Steel Industry?

In October 2013, the State Council issued the “Guiding Opinions on Resolving the Serious Overcapacity Contradiction” (Guofa [2013] No. 41), which stipulated that the steel industry is strictly prohibited from initiating new capacity expansion projects. Any new project must include a capacity replacement plan, implementing either equivalent or reduced-capacity replacement. In February 2016, the State Council again issued the “Opinions on Resolving Excess Capacity and Achieving Recovery and Development in the Steel Industry” (Guofa [2016] No. 6), once more emphasizing strict implementation of Document No. 41 and the absolute prohibition of adding new capacity. In 2016, our ministry released the “Adjustment and Upgrading Plan for the Iron and Steel Industry (2016-2020),” stating that no region is permitted to increase net steel smelting capacity, and structural adjustment and renovation projects must strictly adhere to the principle of reducing capacity through replacement.

Against the backdrop of the country’s vigorous promotion of supply-side structural reform, its unwavering efforts to resolve overcapacity in the steel industry, and repeated strict prohibitions against adding new capacity, capacity replacement has emerged as an important mechanism for effectively combining the strict prohibition of new capacity expansion with structural adjustment. To guide localities in carrying out capacity replacement work, in 2015 our ministry formulated and issued the “Implementation Measures for Capacity Replacement in Certain Industries Suffering from Severe Overcapacity.” This set of measures was valid until December 31, 2017. In accordance with the State Council’s directives and taking into account the current state of industry development, we have revised the original capacity replacement measures and issued the “Implementation Measures for Capacity Replacement in the Steel Industry” (hereinafter referred to as the “Measures”), which take effect from January 1, 2018.

II. Which steel project constructions must implement capacity replacement?

Identifying which project constructions require capacity replacement is a prerequisite for carrying out capacity-replacement work. To prevent individual projects from exploiting loopholes to evade the requirement of replacing newly added capacity, regardless of whether the construction project is new, renovated, expanded, or involves “large-scale repairs at a different location,” as long as the construction involves ironmaking or steelmaking equipment, capacity replacement must be implemented—in short, “if you build a furnace, you must carry out capacity replacement.” According to the “Notice of the State Council on Issuing the Catalog of Investment Projects Subject to Government Approval (2016 Edition)” (Guofa [2016] No. 72), industrial policies serve as the basis for project approval authorities’ review of projects. Therefore, in accordance with Document No. 41 of the State Council, for construction projects in the steel industry, the capacity-replacement plan must be publicly announced before project filing can proceed. For projects that have already been approved or filed but for which the replacement plan has not yet been announced, the proposed or ongoing projects must promptly supplement their announcements with the capacity-replacement plan in compliance with these Measures. It should be noted that capacity-replacement plans that were initiated but not yet fully announced prior to the implementation of these new measures shall continue to be carried out in accordance with the provisions of these Measures.

To this end, the revised Measures stipulate that these Measures apply to projects involving the construction of ironmaking and steelmaking facilities by iron and steel enterprises of all ownership types within the territory of the People’s Republic of China. Prior to filing a construction project, an announcement of the capacity replacement plan must be made. For projects that have already been approved or filed but for which the capacity replacement plan has not yet been announced, the relevant parties must promptly supplement the announcement with the capacity replacement plan.

3. What categories of production capacity can be used for replacement?

Clearly defining the scope of production capacity eligible for replacement is crucial to effectively carrying out capacity replacement work. In accordance with the new requirements set forth in State Council documents, the evolving landscape of industrial development, and the actual practices being implemented across various regions, the revised “Measures” provide explicit guidelines on which production capacities can be used for replacement—specifically, they must simultaneously meet both of the following criteria: “one mandatory requirement plus six prohibitions.”

“The ‘One Must’ specifically refers to smelting equipment used for capacity replacement, which must be included in the inventory of steel industry smelting equipment reported to the State Council by the State-owned Assets Supervision and Administration Commission of the State Council and the people’s governments of various provinces in 2016 as part of their capacity-reduction implementation plans, as well as smelting equipment that was legally and compliantly constructed in 2016 and thereafter. This is a ‘basic prerequisite’—smelting equipment falling outside this scope may not be used for replacement under any circumstances. Even if the equipment falls within the ‘One Must’ scope, it may not be used for replacement unless it also meets the requirements of the ‘Six Prohibitions.’ Local industrial authorities must rigorously verify and ensure that capacity replacements comply with all applicable requirements.”

The “Six Prohibitions” specifically refer to the following six types of capacity that may not be used for capacity replacement: capacity already included in the steel industry’s capacity-reduction targets, capacity that has been phased out and received financial incentives and policy support, “strip steel” capacity, backward capacity, capacity for which the main equipment has already been dismantled prior to confirmation of the replacement, and capacity from non-steel industries such as casting—specifically, smelting equipment used in these sectors. These constitute “one-vote veto” criteria; any violation of even one of these prohibitions will disqualify the capacity from being used for replacement.

The Measures further refine and clarify the scope of capacity replacement, which will help enhance the operational effectiveness of local authorities in reviewing and approving capacity-replacement plans and improve the targeted nature of oversight over capacity-replacement efforts by all sectors of society. The sole purpose is to strictly prohibit the addition of new production capacity.

IV. What are the new changes in the replacement ratio under the newly revised “Measures”?

The replacement ratio refers to the ratio of decommissioned capacity to newly constructed capacity and serves as a key indicator in capacity replacement efforts. Overall, the Measures further tighten the requirements for the replacement ratio: in environmentally sensitive regions such as the Beijing-Tianjin-Hebei area, the Yangtze River Delta, and the Pearl River Delta, the replacement ratio must continue to meet or exceed 1.25:1; in other regions, the requirement has been adjusted from equal-volume replacement to reduced-volume replacement. At the same time, localities are encouraged to adopt even stricter replacement ratio requirements based on their specific circumstances, thereby promoting structural adjustments in the steel industry. Considering the current trends in the accumulation and generation of scrap steel resources in China, and in order to encourage and support the moderate development of electric arc furnace (EAF) short-process steelmaking—where energy-saving and emission-reduction advantages are particularly prominent—the Measures stipulate that steel enterprises in various regions may implement equal-volume replacement when decommissioning blast furnaces and constructing EAFs internally. It is important to note that when decommissioning blast furnaces, the associated sintering, coke oven, and blast furnace equipment must also be decommissioned simultaneously. For blast furnace equipment that is decommissioned along with the blast furnace but does not meet the capacity replacement scope specified in the Measures, such equipment may not be used for replacement purposes.

To standardize the calculation of replacement ratios and prevent the practice of “playing with numbers,” the Measures have adjusted the capacity conversion tables used to calculate these ratios. Specifically, the tables have eliminated the practice of assigning different capacity conversion factors to basic and special steel production capacities for furnaces of the same capacity, replacing them with a uniform conversion factor instead. Furthermore, in accordance with the capacity of electric furnaces when smelting entirely from scrap steel, the capacity conversion standards for electric furnaces and other similar equipment in the tables have been reduced accordingly. When calculating replacement ratios, each enterprise must apply a single, consistent set of conversion factors—meaning that both the capacity being phased out and the capacity under construction should be calculated using this unified table, ensuring relative fairness and reasonableness. It is important to note that the production capacity of smelting equipment is influenced not only by furnace capacity but also closely related to factors such as transformer capacity and oxygen-blowing intensity; thus, even furnaces of the same capacity may have varying production capacities. The capacity conversion tables provided in the Measures represent upper theoretical limits calculated within a reasonable range based on design specifications and do not reflect the actual production capacity of any specific smelting unit. Therefore, these tables are intended solely for calculating replacement ratios and may not be used as the basis for determining existing capacity levels in various regions.

5. Which regions are not permitted to take on production capacity transferred from other provinces (autonomous regions, or municipalities)?

In line with the decisions and arrangements made by the Party Central Committee and the State Council, the steel industry has vigorously promoted capacity reduction over the past two years, achieving significant results and alleviating the severe overcapacity issue to some extent. However, phased and structural contradictions still persist, particularly the growing imbalance between total regional production capacity and environmental carrying capacity as well as regional resource endowments. The State Council has set overall steel capacity control targets for the three provinces and cities of Tianjin, Hebei, and Shandong. Relevant regions can achieve these regional targets through two main approaches: reducing capacity and conducting inter-provincial or inter-regional capacity swaps.

To effectively implement the decisions and arrangements of the State Council and avoid undermining the achievement of regional total-capacity control targets, the Measures stipulate that provinces (autonomous regions and municipalities) that have not yet met their overall steel production capacity control targets shall not accept capacity transfers from other regions. For regions that have already achieved their regional total-capacity control targets, when taking on capacity transfers from other regions, they must firmly uphold the bottom line of not exceeding their regional total-capacity control targets.

6. How do I apply for and confirm the capacity replacement plan?

To enhance the efficiency of the application and confirmation process for capacity replacement plans, the measures further simplify the review and confirmation procedures for such plans. At the same time, to facilitate oversight of capacity replacement efforts by all sectors of society, the measures stipulate that a public notice stage will be added prior to the announcement of capacity replacement plans. The specific workflow is as follows:

Step 1: The enterprise undertaking the construction project shall develop a capacity replacement plan, including details of both the construction project and the projects being phased out. If the capacity replacement involves cross-provincial (or regional/municipal) transfers, a notice of transfer and assignment of capacity must be attached.

Step 2: Construction project enterprises shall submit their capacity replacement plans to the provincial-level departments of industry and information technology in the location of the construction project, in accordance with the relevant requirements of each province (autonomous region or municipality). The provincial-level departments of industry and information technology in the location of the construction project will organize verification to confirm the authenticity and compliance of these plans.

Step 3: The provincial-level department of industry and information technology in the location of the construction project shall publicly announce the capacity replacement plan on its official website. After receiving no objections, the plan will be officially announced.

Specifically, the procedure for announcing the transfer of production capacity is as follows: The party seeking to transfer capacity submits an application. If the transferring party is a subsidiary of a central enterprise, it shall submit the application to its parent central enterprise for verification of the authenticity and compliance of the transferred capacity. After confirmation by the State-owned Assets Supervision and Administration Commission of the State Council, the central enterprise will publicly announce the transfer to the society. If the transferring party is another enterprise, it shall submit the application to the provincial-level department of industry and information technology in its jurisdiction for verification and then proceed with public announcement.

7. Must the capacity-replacement equipment be dismantled, and if so, when should it be dismantled?

The successful removal and decommissioning of the replaced equipment is the core of effective capacity replacement work. To this end, the measures further clarify the evaluation criteria and time limits for ensuring that the old equipment is properly removed and decommissioned—specifically, firmly enforcing the requirement that “the replacement plan must be publicly announced before a new project is filed, and the replaced equipment must be dismantled before the new project begins production.” There are two key time limit requirements: First, the replacement plan must be publicly announced prior to project filing; without such announcement, the new project cannot be filed, let alone commence construction. Second, the equipment designated for replacement must be completely dismantled and removed before the new project starts production. If the equipment specified for removal in the capacity replacement plan has not been fully dismantled, the new project may not be ignited or put into trial production. There is only one criterion for determining whether equipment has been properly decommissioned: the equipment designated for replacement must be completely dismantled and removed. Therefore, enterprises and relevant authorities must rigorously adhere to this principle at every stage of formulating and reviewing capacity replacement plans and implementation schemes, thereby avoiding any disruption to the effective implementation of these plans.

8. What are the rights and responsibilities of the parties involved in capacity replacement?

Capacity replacement shall be carried out in accordance with market-oriented principles, with the applicant—comprising both the builder and the party transferring capacity—voluntarily reaching an agreement through negotiation and then proactively submitting an application. To ensure the smooth implementation of capacity replacement and strengthen its enforcement, these measures further clarify the relationships among all parties and explicitly define their respective rights and responsibilities, striving to achieve a consistent alignment between rights and obligations.

Enterprises exiting equipment are the implementing entities responsible for dismantling and replacing equipment according to schedule, and they are also the beneficiaries entitled to economic compensation or potential benefits from new projects. The provincial-level departments of industry and information technology serve as the review authorities for capacity replacement plans and are responsible for overseeing the proper dismantling of replaced equipment. In inter-provincial capacity replacements, the provincial-level department of industry and information technology (or the central enterprise concerned) in the location of the transferring party is responsible for ensuring that the replaced equipment within its jurisdiction (or within its own enterprise) is properly dismantled and removed.

9. How should it be handled if capacity replacement is not implemented as required?

To promote the standardized implementation of steel capacity replacement by all parties, the Ministry of Industry and Information Technology, together with relevant departments, will adopt various measures to strengthen supervision during and after the event, including accepting oversight from all sectors of society, organizing regular self-inspections across regions, and conducting unannounced spot checks.

For violations of the regulations—including failure to implement capacity replacement as required, lax review of replacement plans, and inadequate implementation of capacity replacement—measures will be taken at two levels. First, enterprises found to have engaged in fraud or failed to adequately implement the requirements will be subject to joint sanctions in accordance with laws and regulations, including considering measures such as ordering the suspension of projects that do not meet capacity replacement requirements and adding the involved enterprises to lists of untrustworthy entities. Second, regions and central enterprises whose reviews were lax and oversight was inadequate will be ordered to make rectifications within a specified time frame; in cases of serious violations, the issues will be reported nationwide, and relevant persons in charge will be held accountable according to applicable laws and regulations.