China: Sichuan proposes 1.5:1 steel capacity replacement ratio

• Equivalent capacity replacement allowed for electric furnaces, low-carbon projects
• Draft limits new capacity outside compliant industrial parks,capacity transfers between enterprises

Sichuan has proposed a minimum capacity replacement ratio of 1.5:1 for ironmaking and steelmaking projects, as part of revised rules aimed at addressing steel overcapacity and promoting industry restructuring and upgrading.

The Sichuan Provincial Department of Economy and Information Technology released the revised rules for public comment on 23 September, with the consultation period running until 23 October. The rules would apply to the construction, renovation, and expansion of ironmaking and steelmaking equipment at steel enterprises in Sichuan.

Lower replacement ratios for electric furnaces, low-carbon projects

The draft provides for lower replacement ratios in specified cases. Substantial mergers and reorganisations would qualify for a minimum replacement ratio of 1.25:1.

Equivalent capacity replacement would be allowed when a converter and its associated blast furnace are phased out and replaced with an electric furnace, provided the phased-out blast furnace capacity is not used for capacity replacement. It would also apply where both the phased-out and newly constructed steelmaking equipment are electric furnaces. Certain electric-furnace projects using special processes for high-end special steels would also qualify for equivalent replacement.

The draft also provides equivalent replacement for projects using low-carbon metallurgy and electric-furnace processes if ironmaking carbon emissions are reduced by at least 60% compared with the blast furnace process. For three years from the implementation of the national 2026 capacity replacement measures, qualifying ironmaking projects achieving at least a 30% reduction would be subject to a minimum replacement ratio of 1.25:1.

Restrictions on capacity transfers

The draft prohibits the addition of steel production capacity in violation of regulations and the construction or expansion of steel smelting projects outside compliant industrial parks. It also prohibits the transfer of steel production capacity to key regions and to provinces or cities where the state has established explicit total steel production capacity controls.

For two years from 18 May 2026, when the national capacity replacement measures took effect, ironmaking and steelmaking capacity replacement can take place between different enterprises or enterprise groups. After this period, such transfers would be prohibited, with capacity integration or transfer permitted only through substantive mergers and reorganisations.

The draft excludes several types of equipment from capacity replacement, including equipment already covered by steel capacity reduction targets and receiving incentives or subsidies, equipment classified for phase-out, incomplete equipment, and equipment belonging to enterprises with prolonged periods of low utilisation. Equipment used to produce castings, forgings, ferro alloys, and similar products is also excluded.

Phase-out, project controls

Before a replacement project begins production, the capacity transferor must dismantle the phased-out equipment used for replacement so that it is no longer capable of resuming production. Local authorities will verify the construction of the new project against the announced replacement plan and check whether the phased-out equipment has been dismantled.

Capacity replacement plans would be valid for 24 months. Projects must complete procedures including filing, energy conservation review, carbon emissions assessment, and environmental impact assessment, and formally commence construction within that period. The proposed rules would remain valid for five years from their effective date.

The draft also requires construction projects to meet energy-efficiency benchmarks and Grade A environmental performance standards. Relevant procedures would also require equivalent or reduced replacement of major pollutant emissions, energy consumption, and carbon emissions.

Implications for Sichuan steel capacity

The draft points to tighter control over net additions while giving greater flexibility to electric-furnace and low-carbon projects. The emphasis on capacity retirement, substantive consolidation, and emissions performance could make conventional blast furnace replacement more restrictive, while improving the scope for scrap-based and lower-carbon steelmaking projects.