Chinese planner vows industrial production cuts will continue

Date: Wednesday, March 7, 2018
Source: Asia Nikkei

The Chinese government on Tuesday hailed success in reducing industrial overproduction and promised more cuts as part of structural reforms and efforts to address environmental pollution. Rising prices, especially for steel products, could however make further progress more difficult. 

Officials said 55 million tons of steel production capacity was eliminated last year, following a cut of 65 million tons in 2016.

"This is an amazing result," He Lifeng, chairman of the National Development and Reform Commission, told reporters at a briefing in Beijing. The previous day, Premier Li Keqiang set a target of reducing steel capacity by 30 million tons this year.

Back in 2016, the government announced a five-year plan to reduce annual steel production capacity by 100-150 million tons, or up to 10% of overall capacity. If the 2018 target is met, China will achieve its overall steel capacity cut goal ahead of schedule.

According to Macquarie Research calculations, China has removed about 180 million tons of steel capacity since 2015. If Beijing's plans are strictly executed, the bank's analysts forecast that this year's cuts should bring the country's total annual crude steel production capacity to below 1 billion tons for the first time since 2012.

Li on Monday also set a target of reducing coal production capacity by 150 million metric tons this year. This come after cuts of 540 million metric tons over the past two years, as part of a goal of bringing down capacity by 800 million metric tons by 2020.

Under a top-down approach to achieve 6.5% economic growth in 2018, Li said China will be "bolder" in executing reforms by reforming unproductive enterprises and reducing the debt of private and state-owned companies. Industrial overcapacity is partly the legacy of incentives that encouraged local officials to support expanding production in the name of rapid economic growth.

After the initial success with steel, the NDRC's He said the approach to reducing overcapacity could be duplicated in plate glass, cement, electrolytic aluminum and other industries.

Rising commodity prices could complicate the picture however. East Asian hot-rolled steel coil prices nearly doubled to around $600 a ton in January from the level seen two years earlier.

"The run-up in prices in both coal and steel are increasing incentives for steel and coal firms to bring new production back on line, meaning Beijing will need to keep up the pressure simply to prevent backsliding," said research company Eurasia Group in a note on Monday.

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