China’s steel industry needs to reforge itself through painful reforms before the world’s largest steel producer can iron out its overcapacity problems, analysts who follow the market say, though a legacy of climbdowns by reformers in the face of local intransigence will be hard to overcome. These barriers appear because higher unemployment levels and lower production output when plants are mothballed and companies merged mean less taxation revenues for local governments and more social security costs as families turn to state support as bread winners lose their jobs. “Two mounting issues have kept the Politburo worried: employment and debt, which could undermine social/financial stability. Policy response now makes us believe closure will be slow and Chinese steel will continue to flood the international markets,” Jefferies’ equities analysts Po Wei and Howard Lau wrote last week. Speaking at a meeting of steel industry executives early this month, Premier Li Keqiang said the mainland would set a “ceiling” on steel production with capacity control, production cuts and rationalising inventories all part of the reform agenda. China’s steel plant utilisation stood at around 67 per cent last year, well below the 85 per cent or above between 2000 and 2008, when the industry was on a roll. Such a grim outlook formed the backdrop to recent comments by Zhang Guangning, chairman of the China Iron and Steel Association, when he said that “in years to come, apparent consumption will see a slow reduction trend ... resulting in severe imbalances among production capacity, output and consumption”. Two mounting issues have kept the Politburo worried: employment and debt Po Wei and Howard Lau, Jefferies Crude steel apparent consumption – defined as the sum of production, net import and net decline in inventory – fell 5.5 per cent year on year to 645 million tonnes in the first 11 months of 2015, after declining 3.3 per cent in 2014, while the association’s 300-plus steel mill members recorded a combined net loss of 53.1 billion yuan (HK$62.8 billion) in last year’s first 11 months as sales shrank 19.3 per cent to 2.67 trillion yuan. The China Metallurgical Industry Planning and Research Institute last month forecast mainland steel output would fall 3.1 per cent this year to 781 million tonnes, after a 2.1 per cent decline last year. A 28 per cent surge in net exports in the first 11 months of last year has cushioned the Chinese steel industry from the full brunt of the demand decline. Exports are expected to increase further after the Ministry of Finance lowered export taxes on low-end steel products such as pig iron and steel billet from the start of this year. Steel and iron production were among six industries earmarked for reform at the just concluded Economic Work Conference, where central government objectives and policy plans for 2016 were decided. A 20 per cent reduction in capacity in these industries, which include coal mining and cement, may lead to job losses totalling 3.56 million, UBS data shows, equivalent to 0.65 per cent of total non-farming employment. The threat of job losses means reforms will “likely proceed cautiously and will rely on centrally owned SOEs and the central government to provide some support to localities that are more heavily impacted”, UBS analysts wrote. That suggests there will need to be some serious political arm twisting at a local level where job losses will be felt most acutely or a lot of political compromise. Most analysts suspect it will be the latter. At the Taiyuan Steel Group, visited by Premier Li recently, 40,000 out of 50,000 workers will lose their jobs, Jefferies analysts wrote. The central government is planning to give them a monthly 1,500 yuan subsidy for two years, while at the same time training them for alternative employment. In total, 100 billion yuan had been earmarked to cushion layoffs and restructure existing debts, Jefferies analysts wrote. That money will be needed as despite a 3 per cent to 8 per cent increase in steel prices since December analysts say the industry is still far from any meaningful recovery.