China’s 150m tons of steel cuts seen too small

The Pak Banker - - BUSINESS -

Plans to shrink China's bloated steel in­dus­try will prob­a­bly fail to stem in­dus­try losses or curb the del­uge of ex­ports that's hurt­ing pro­duc­ers from In­dia to the U.S. and Europe.

As much as 150 mil­lion tons of ca­pac­ity will be shut un­der a five-year blue­print that's part of a swathe of sup­ply-side re­forms di­rected by Pres­i­dent Xi Jin­ping. The govern­ment is trim­ming the in­dus­try as de­mand sags af­ter decades of ex­pan­sion. The cuts, amount­ing to 13 per­cent of ca­pac­ity at most, fall short of re­quire­ments, ac­cord­ing to an­a­lysts from Cap­i­tal Eco­nom­ics Ltd., Mac­quarie Group Ltd. and Arg­onaut Se­cu­ri­ties (Asia) Ltd.

"The an­nounce­ment is ac­tu­ally a dis­ap­point­ment," Caro­line Bain, a Lon­don-based se­nior com­modi­ties an­a­lyst at Cap­i­tal Eco­nom­ics, said by e-mail. "Now that we know this is in­tended to hap­pen over five years, the im­me­di­ate mar­ket im­pact seems min­i­mal and could ac­tu­ally be neg­a­tive."

While steel pro­duc­tion fell last year for the first time since 1981, de­mand is wan­ing even faster and the na­tion is send­ing record vol­umes over­seas. Shares in the world's big­gest mill ArcelorMit­tal have dropped 58 per­cent in the past year, partly be­cause the ex­ports are fu­el­ing a slump in prices and prof­its.

"China's still go­ing to be ex­port­ing steel and as­so­ci­ated de­fla­tion­ary pres­sures for a while," Colin Hamil­ton, head of com­modi­ties re­search at Mac­quarie in Lon­don, said by email. The world needs 200 mil­lion tons to 250 mil­lion tons of ca­pac­ity cuts, he said.

The blue­print in­cludes a ban on new ca­pac­ity, fi­nan­cial sup­port for the mills and en­cour­age­ment of merg­ers and ac­qui­si­tions. About 400,000 jobs may be lost, a lead­ing of­fi­cial with a sta­te­owned con­sul­tancy said in Jan­uary. Steel­mak­ers' shares rose on Fri­day, with An­gang Steel Co. up 3.2 per­cent in Hong Kong and Baoshan Iron & Steel Co. gain­ing 2.5 per­cent in Shang­hai. A raft of Chi­nese steel­mak­ers have warned of big losses or large profit de­clines in the past few weeks, with An­gang Steel, the fourth­biggest, pre­dict­ing a 4.38 bil­lion yuan ($667 mil­lion) loss and Wuhan Iron & Steel Co. see­ing a 6.8 bil­lion yuan loss.

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