Tue, Aug 20, 2013 - Page 9 News List

China’s heavy industry set to face market forces

Loss-making steel firms in China produce 300 million tonnes of excess capacity and enjoy huge subsidies from debt-laden local governments, but it is unclear whether they will be allowed to go bankrupt and reform looks likely to be slow and partial

By David Stanway  /  Reuters, BEIJING

“Reform is going to hurt, but not reforming will hurt more,” said Jiang Feitao (江飛濤), policy researcher with the China Academy of Social Sciences (CASS).

“HUGE MONSTERS”

Beijing has sought to rein in the steel sector since 2003, but attempts to strong-arm firms and local governments have failed. China’s capacity surplus now stands at about two-fifths of last year’s output of 716.5 million tonnes. Utilization rates last year fell to 72 percent.

The old approach was typified by a target, set in 2010, to put 60 percent of total steel capacity under the control of the 10 biggest firms by 2015. Despite heavy-handed efforts to force mergers, the market share of the top 10 fell from 49 percent in 2011 to 45.94 percent last year, official data showed.

“If you are just forcing the largest firms to be even bigger producers and have even larger shares of the market, you risk introducing inefficiencies into the industry,” Shanghai-based Macquarie analyst Graeme Train said. “That is a realization that the government is coming to now.”

The target ended up raising total capacity rather than cutting it, said Xu Lejiang (徐樂江), the chairman of the Baoshan Iron and Steel Group, parent of Shanghai-listed Baosteel and China’s second-biggest steel producer, speaking at the CISA meeting.

Xu said “administrative factors” had turned steel firms into “huge monsters” lumbered with massive unprofitable investment.

He urged China to “make market forces the guiding principle.”

Miao said China had failed to establish strong and universally enforced environmental rules, quality standards and even rates of taxation. The ministry says market signals have been distorted in all areas, including energy and land prices, leading to “blind investment.”

SURVIVAL OF FITTEST

It remains to be seen whether Beijing or local governments will consider widespread closures a price worth paying. A small steel firm declared itself insolvent earlier this year, but bankruptcies remain rare despite mounting losses, even at well-connected state-owned firms.

While many industry minnows voluntarily go out of business when times are hard, China lacks a bankruptcy mechanism to allow creditors to be compensated. Local governments have encouraged larger firms to acquire stricken assets and minimize job losses.

Mills receive hefty subsidies from local governments and also compensation for closing outdated plants and complying with state environmental rules. The 15 firms surveyed by Reuters received at least 127 million yuan in the first quarter of this year.

Even if Beijing ordered subsidies to stop, state enterprises have access to cheap land and loans, as well as low prices for energy and raw materials. They are even given stakes in projects such as coal mines to make them economically viable.

“They use land, government finance, direct subsidies, which are all major causes of overcapacity,” Jiang said. “If local government income doesn’t keep rising, these subsidies to local steel firms can’t keep rising either and in the end, they will be forced to restructure, whether the system is reformed or not.”

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