SHANGHAI, Jun. 3 (SMM) – China has seen more severe overcapacity during the past couple of years, with steel and building material sectors entering bitter winter. Emerging industries, such as PV, LED, and hydropower equipment, also reported tough situations. In this context, tackling overcapacity is vital for China’s industrial restructuring.
Officials from the Ministry of Industry & Information Technology (MIIT) said May 29 that the entrance requirements for copper, lead and zinc industries may be modified for tackling overcapacity. Besides, the excess capacity in some emerging sectors, such as solar energy, hydropower, new materials, also received much attention.
The MIIT is reportedly developing new programs for resolve the problem jointly with several other authorities, including the National Development & Reform Commission, and the written plan will be submitted to the State Council.
Capacity Remains in Excess
The severe overcapacity has left many domestic enterprises on the verge of losses. Debt/asset ratio of China’s steel industry increased 1.44 percentage points by the end of 2012, with the average ratio of 44 listed companies hitting 60.35%. This number increased further this year to 61.52% in by late March. Latest data from the China Iron & Steel Association showed that China’s average daily crude steel output in Q1 hit a record 2.132 million mt, leaving overcapacity and oversupply the most prominent issue for steel mills. Similarly, price falls and serous losses arising from overcapacity also occurred to other sectors, including plate glass, cement, and aluminum.
New energy and new material sectors also witnessed signals of overcapacity, with large amounts of enterprises forced to shut down. According to industry insiders, demand growth in many industries began slowing due to the economic slowdown, leaving overcapacity a pronounced issue, and the excess capacity in emerging industries is also a reflection of the absence of overall planning at the early development stage.
Guo Fanli, senior researcher at the CIC Industry Research Center, attributes the overcapacity to three major factors. First, the global economic downturn caused some export-oriented enterprises to flow into domestic markets, combined with the persistently high inventories and falling prices, capacities in many industries were idled. Second, the stimulus measures rolled out by the central and local governments following the subprime crisis resulted in a surge in fixed-asset investment and massive capacity expansion. Third, expansion in some sectors is encouraged by local governments due to its contribution to employment.
Outdated Capacity Elimination Delivers Little Effect
China’s has never stopped its efforts to resolve overcapacity problems, but saw poor results. Industry insiders pointed out that tackling the issue is a complicated and tough work.
Although the MIIT kept eliminating inefficient capacities, steel mills were continuously expanding at the mean time. China’s crude steel capacity has hit 970 million mt/yr by the end of 2012, with 22 million mt/yr still under construction. Meanwhile, steel industry saw a 200 million mt/yr surplus of capacity. Besides, given the falling coal prices and rising capacity, China is expected to see a surplus of 500 million mt in coal inventories this year.
Why is Overcapacity Exacerbated?
Guo Fanli noted that some enterprises built larger capacities soon after eliminating backward capacities or even built new capacities without approvals. That combined with aggressive investment of local governments and regional protection, intensified overcapacity problems.
Zhu Hongren, chief engineer of the MIIT said at a press conference earlier this year that overcapacity is not entirely caused by market, but also developing patterns, regulations and regimes in affected industries.
Whether Overcapacity Will be Tackled?
Now that overcapacity has become an urgent problem in China, and the Chinese government is more determined to tackle the issue that ails so many industries.
Some analysts say the government is improving the policies for resolving the issue given the recent trends for policymaking, and the breakthrough will be achieved on the issue should regional protectionism be eliminated.
Guo Fanli said the government should improve its regime for resource tax, for instance, to replace the specific duties by ad valorem duties, and reduce resource tax imposed on coals and raise that on steel products. Besides, resource taxes paid by many enterprises should be properly utilized. Finally, powers should be delegated reasonably to lower levels to add to responsibility of local governments and liberalize the market.