China underwhelms with salvo to slim bloated industry

PUBLISHED : Wednesday, 31 July, 2013, 1:50pm
UPDATED : Wednesday, 31 July, 2013, 1:50pm

China’s edict to more than 1,900 companies to shut excess production capacity by September is the latest effort to slim down bloated industries, but in the key steel, aluminium and cement sectors the cuts are just a fraction of their surpluses.

Broader efforts, including credit curbs, raising environmental standards and energy efficiency will help slow the expansion of these sectors, but Beijing’s push towards industry consolidation will be slow to materialise, analysts said.

Premier Li Keqiang has vowed to curb overcapacity as part of efforts to shift the economy away from investment in heavy industries, a move that could dampen its appetite for raw material imports such as iron ore, coal, copper and bauxite.

China is the world’s biggest producer of steel, aluminium and cement.

Beijing’s latest orders suggest less than 1 per cent of steel and aluminium production capacity will shut by September, which analysts said will still leave a significant surplus. In cement, the shutdown will cover about 3 per cent of production capacity, also only denting the excess.

“Many of these plants that have overcapacity problems have actually idled their production line for a while,” said Raymond Yeung, an economist with ANZ Banking Group. “So the actual impact of the cut on the rebalancing of supply will be pretty mild.”

China has ordered about 7 million tonnes of excess steel output to be shut in a sector that the China steel association says has surplus capacity amounting to 300 million tonnes.

It has ordered 260,000 tonnes of excess aluminium output to be shut when smelting capacity is 27 million tonnes and demand is about 21 million tonnes.

Many smelters ordered to shut were already running at production rates as low as 20 per cent and the impact of the shutdowns will be offset by some 2 million tonnes of new projects due to start by the end of this year, analysts said.

China has said 92 million tonnes of excess cement production must be phased out. Capacity is now about 3 billion tonnes a year and demand is 2.2 billion tonnes.

“The expansion of aluminium smelting plants happening in the western regions like Xinjiang will have a cheaper production cost and that will again hit domestic prices further,” said Liao Zhenyuan, an analyst at Minmetals Futures.

In base metals, China also plans to phase out 654,400 tonnes of copper production capacity.

The nonferrous metals association estimates there was more than 7 million tonnes of idle capacity last year and production capacity is expected to reach 40 million tonnes by 2015.

More broadly, analysts have said that for now Li will avoid radical macro reforms out of concern it could weigh too heavily on growth in the world’s second-biggest economy.

Beijing’s previous efforts to rein in “blind expansion” in some sectors have been thwarted by local governments that have offered cheap land, tax deductions, subsidies and loans to attract investment, the People’s Daily said on Tuesday, citing a spokesman for Ministry of Industry and Information Technology.

Of the 18 million tonnes of aluminium capacity added in recent years, only 800,000 tonnes were approved by the central government, the paper reported, adding that China also has 800 million tonnes of unapproved cement capacity.

In a sign of Beijing’s resolve to fix the problem, the State Council has talked about limiting credit and blocking approval of new projects. New and existing projects must include stricter rules on environmental protection and power consumption.

It has already issued tougher standards for the aluminium sector and similar rules are expected for steel, cement and other industries.

“Beijing is finally getting its message across that there will be no stimulus to help them this time, so there’s a wider recognition from these sectors that they need to restructure,” said Andrew Driscoll, a resource analyst with CLSA-Asia Pacific.

“But these industries tend to be big employers and have heavy debts, and the local governments also have vested interests to keep them alive. This will make the consolidation a very slow process.”