China's Steelmakers Rise After Premier Li Vows Capacity Cuts

Updated on
  • Coal industry to see `large-scale' output reductions
  • Resolving overcapacity part of nation's supply-side reform

China’s biggest steelmakers rose after Premier Li Keqiang pledged deeper cuts to capacity, backed by support for workers who lose their jobs amid a restructuring of the world’s biggest steel industry.

Hebei Iron & Steel Co. Ltd., the top steelmaker, outpaced the benchmark index to rise as much as 4.3 percent to 3.38 yuan in Shanghai, while Baoshan Iron & Steel Ltd., the second-biggest, rose 5.3 percent. China aims to shut between 100 million and 150 million metric tons of capacity as it tackles oversupply in heavy industry, according to a statement Sunday on the government’s website, citing a State Council meeting on Jan. 22. No time frame was mentioned.

“The capacity-reduction targets are not aggressive, but it still helps re-balance the steel market,” Helen Lau, an analyst at Argonaut Securities (Asia) Ltd., said in a note. A reduction of up to 150 million tons would “slightly improve” utilization rates, she said.

Bloomberg Intelligence reported in November that China’s crude steel capacity reached 1.16 billion tons in 2014, citing the China Iron & Steel Association, causing utilization to drop to 71%, the lowest in more than a decade. Still, the Chinese market has remained heavily oversupplied, creating a global glut and triggering trade tensions as the nation exports its surplus.

Weak Demand

Heavy industry in China is facing the weakest demand in a generation, as the government steers the world’s second-biggest economy away from reliance on infrastructure and investment toward consumer-led growth, forcing cuts to jobs and output. The Jan. 22 meeting noted that “resolving overcapacity in the steel and coal industries” is an important step in promoting supply-side reforms.

China’s coal industry would see “large scale” reductions in output, according to the statement. China Coal Energy Co. rose 2.7 percent in Hong Kong and China Shenhua Energy Co., the country’s biggest coal producer by market value, climbed 1.4 percent.

Li also highlighted the need for measures to redeploy or support employees laid off by plant closures, the statement said. These include proper payment of wages and social security, help in starting new businesses or transferring to other industries, and ensuring that assistance is given in a timely manner.

The easiest shutdowns in the steel industry have already happened, HSBC Holdings Plc said in report last month that warned large-scale layoffs had the potential to spark social unrest. Job cuts in the steel, coal, cement, aluminum and glass industries may total as many as 3 million in the next three years, China International Capital Corp. said Jan. 11.

Firms that meet capacity closure targets will be helped in reducing their workforce and disposing of bad assets, Li said during a meeting in Shanxi province, according to a Jan. 7 China Central Television report.

Hebei Steel trimmed gains to trade 2.5 percent higher at 3.32 yuan at 11:30 a.m., while Baosteel was up 2.6 percent at 5.63 yuan.

— With assistance by Martin Ritchie

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