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Sector steels itself for capacity cuts

By Jiang Wei (China Daily)
Updated: 2009-06-01 10:25

A crane operator looks at a floor filled with steel products as he takes a break on a perch at a warehouse run by the Shanghai Yirong Trading Co, Ltd in Shanghai.[Bloomberg News]

With the removal of four furnaces, one of which had been operational for over 50 years, Hebei Iron and Steel Group (HBIS) took its first steps toward meeting its goal of closing 1.7 million tons of outdated capacity this year.

The group's campaign, which sees the decommissioning of facilities equivalent to those of a small steel mill, is part and parcel of a national effort amid the financial crisis to cap output in the iron and steel industry by closing inefficient or polluting mills.

The National Development and Reform Commission (NDRC), the nation's top economic planning body, last month issued proposals to clear the industry of blast furnaces smaller than 300 cubic meters, and electric arc furnaces and converters with a capacity less than 20 tons.

Related readings:  Major steel producers report losses in first 4 months  China’s March steel exports total 1.67 million tons  Steel prices and exports slump in March  CISA: Domestic steel industry remains unprofitable

By 2011, it expects to have cut the nation's iron-producing capacity by 72 million tons and its steelmaking capacity by 25 million tons.

China Iron and Steel Association (CISA) Vice-Chairman Luo Bingsheng said that overcapacity was one of the biggest problems confronting the industry, and that the global financial crisis had encouraged the authorities to address it.

As the world largest steelmaker, China's crude steel production capacity exceeds 600 millions tons, with a surplus of 25 to 30 percent expected this year.

"When the market is good, it is difficult to close outdated mills because everyone is making money," Luo said. "But when the market has problems, it may just be easier to close some inefficient firms."

Based on the goals set by the NDRC, each provincial government has its own target to meet. Hebei, a major steelmaking province neighboring Beijing, plans to get rid of 20 million tons of capacity, around a quarter of the national total.

Tangshan, Handan, Xingtai and Zhangjiakou will be the first cities in the province to close outdated mills this year.

Wang Dayong, secretary-general of Hebei's metallurgical industry association, said that more attention would be paid to energy saving, while environmental protection would be a prerequisite for any new projects. Meanwhile, a carrot-and-stick approach will be used, with companies punished if they fail to close outdated capacity, while those meeting the targets will be rewarded.

According to statistics from Luo's association, most of the province's overcapacity comes from small- and medium-sized companies, whose output grew 20 percent in the first quarter of this year, as opposed to a 2.7 percent decline among the big players.

Small- and medium-sized steelmakers can resume operations quickly due to their relative cost advantages. Many small- and medium-sized steelmakers have restarted production this year, offsetting major steelmakers' production cutbacks.

CISA is urging steelmakers, particularly small ones, to voluntarily cut the output of products suffering from a supply glut, such as HR sheets, CR sheets and medium plate. It will also hammer out measures to further cut the number of traders in imported iron ore and steel products.

In addition, the Ministry of Industry and Information Technology (MIIT) has called on commercial lenders to cut or even halt loans to steelmakers that blindly expand their production capacity.

This directive has been described as the ministry's most severe "capacity-control directive".

Fan Haibo, an analyst with Cinda Securities, said that the key to the policy's effectiveness is how it is implemented at the grassroots.

And he cautioned that the "impact of the new policy is likely to be limited because many small steelmakers are still major local taxpayers.

"(Amid the global financial crisis) local governments are particularly committed this year to securing economic growth and protecting jobs," he said.

The industry's smaller players are reporting healthier profits than the bigger boys, with local governments working hard to protect them, said an insider who declined to be named.

Qiao Peitao, an analyst at Greatwall Securities, said that meaningful reductions in the nation's steelmaking capacity may only be achieved once the economy gets out of the doldrums.

"The government will be able to take more progressive measures to shut inefficient capacity once the economy recovers," he said.

He regarded the ministry's measure on loans to the industry as a reaction to the stalemated negotiations with major international miners over benchmark iron ore prices.

If the government managed to close inefficient capacity and control iron ore imports, "it would be the best result we could expect and would have a long-term impact on the industry", he added.