Across The Border | Taking the scalpel not the right solution for China’s steel woes
Cutting capacity could have a spillover effect in terms of job losses and more bad debts for lenders, say analysts
Capacity elimination in China’s steel industry may look simple on paper, but in reality could be a painful exercise with huge social and financial ramifications, said industry analysts.
“Some of the “overcapacity” that was eliminated has found its way back after mills resumed production following a marginal recovery in steel prices during the first quarter of this year, ” said Laura Zhai, an analyst with global ratings agency Fitch Ratings.
According to Zhai, the best solution to China’s steel woes is to allow more enterprises to go bankrupt. “But it is not that easy due to the huge financial leverage of the industry and the vast number of people it employs,” she said.
The fund is far from enough to cover the actually needed settlement allowance
On the ground, however, some mills are already preparing to resume production. Two out of the five furnaces have been warmed up at Songting Steel in Tangshan, north China’s Hebei province with partial production set to resume later this month or in May, sources said. The mill was shut last November by the Hebei government as part of its efforts to reduce capacity in the sector.
Analysts like Zhai feel that nothing much would change for the steel sector in 2016 and 2017.
“That said, there are many in the industry who are expecting fresh guidelines from Beijing on how to identify problematic enterprises and then close them down with the least possible harm, both socially and financially,” she said.
The central government had earlier this year set a target to eliminate 100 million to 150 million tonnes of steel capacity by 2020, after the sector suffered its worst year of price drops and huge overcapacity. It has also set aside a special fund of 100 billion yuan (HK$119.8 billion) to resettle steel and mining industry workers made redundant due to the capacity cuts.