FT Alphaville has wondered about the effects of lingering industrial overcapacity in key Chinese sectors before, especially in connection with commodity prices.
Now the Chinese government looks to be taking action.
A report in the China Daily on Tuesday said Beijing would force small steel mills with steel blast furnaces of less than 400 cubic meters to shut down production by the end of next year.
The government’s justification: fear that overcapacity would eventually threaten the country’s recovery, according to China Daily.
As the newspaper explained:
The State Council, China’s cabinet, published a document on Tuesday, saying all steel blast furnaces in this size class will be closed to rein in overcapacity and force upgrades in the industry. “These small steel mills are mostly located in Shandong and Shanxi provinces,” said Du Wei, an analyst with industry consultancy firm Umetals.com.
The industry has been facing oversupply problems which have weighed on steel prices and squeezed profit margins, China’s steel lobby China Iron and Steel Association warned.
China’s crude steel production capacity was forecast at 700 million tons at the end of 2009, while China’s steel output stood at 567.84 million tons last year.
And that wasn’t it. A note on gov.cn this time, reported that:
China will continue to shut down outdated capacity in major industrial sectors to reduce pollution, save energy, and upgrade industry, the State Council, or Cabinet, said in a statement released Tuesday.
The sectors include power, coal, steel, cement, non-ferrous metals, coke, paper making, tannery and printing and dyeing, according to the statement. The country will eliminate by the end of 2010 more than 50 million kilowatts of small coal-fired power generators and 8,000 small coal mines which are lacking in work safety standards, overly energy-intensive or not environmentally friendly.
Small coking coal makers with a coking chamber height of less than 4.3 meters will be closed by the end of 2010, the statement said. It said the country will phase out mill furnaces below 6,300 kilovolts in the ferro-alloy sector and calcium carbide by the end of 2010.
All of which quite confusingly comes in the context of rapidly ascending copper prices, which have seemingly defied warnings about upcoming Asian demand weakness and related overcapacity issues.
The background here is that Chinese demand has long been heralded as the key driver behind copper prices by analysts.
Still, Commerzbank analyst Eugen Weinberg remarked to Reuters on Wednesday that copper did look set to weaken “as demand from top consumer China could well soften and the demand outlook in the West remained poor”.
The news wire also noted that the arbitrage window between London and Shanghai had been firmly closed for a while. If anything, this suggests Chinese imports should tail off even further. Overall, Reuters reported Shanghai prices had risen 4.8 per cent so far this year, versus a rise of about 8 per cent on the LME.
Not that LME stocks themselves have shown much of a demand related fall in that time, at least on a historical basis:
All that said, the official line from the copper industry is that demand is now being driven by developed countries and not by Asia. Furthermore, industry players say developed markets should be able to compensate for any prospective demand falls stemming from Asia. As the FT reported on Tuesday:
Mining executives and some analysts and traders say that the surge in copper and other metals reflects re-stocking in developed countries, after companies ran down their inventories to critically low levels last year during the economic crisis.
“We believe that the world ex-China has already started on a dramatic restocking programme,” said Julien Garran, a commodities analyst at UBS in London.
There’s also the argument that by dealing with a relatively small overcapacity issue now, China has effectively resolved a potentially larger problem to come further down the line – a fact that should help buoy demand for commodities overall.
Related links:
Is China on the verge of a commodities unwind? - FT Alphaville
Reining in the Chinese inflation dragon – FT Alphaville
China tightening? Yeah right. – FT Alphaville