New | ‘One Belt’ infrastructure investments seen as helping to use up some industrial over-capacity

China’s “One-Belt, One-Road” strategy may win its construction and engineering firms many billions of US dollar worth of contracts for decades to come and create demand for building materials, but it will not be the panacea for the decade-long chronic over-capacity problem of the nation’s basic materials industries.

To restore demand and supply balance in the steel, cement and aluminium sectors, where excess capacity has persisted since at least 2004 and amounted to as much as 35 per cent of total capacity, exporting the problem away is not realistic and many years of painful closures of outdated and inefficient plants are unavoidable, analysts said.

“For cement makers, high logistics costs relative to product prices means they have to set up plants overseas instead of meeting overseas demand by exports,” said Lawrence Lu, a senior director of corporate ratings at ratings agency Standard & Poor’s. “For steel makers, also due to logistics costs, exports are only sustainable in the long term for higher value-added products.

“To resolve the problem, uncompetitive production lines need to be shut.”

Beijing’s “One Belt, One Road”[OBOR} trade strategy, initiated by President Xi Jinping two years ago, was “a brilliant plan and will be a lasting legacy” that aims to leverage China’s massive foreign exchange reserves and strength infrastructure construction to improve trade with and exports to the over 60 OBOR nations for mainland industries with over-capacity, CLSA head of China and Hong Kong strategy, said in a report.

Policy bank China Development Bank has doled out US$125.9 billion of loans for 400 projects in OBOR regions by the end of last year, and it had plans to fund 900 projects with US$800 billion of investment, according to a report by ratings agency Fitch.