China Vows to Tackle Steel Overcapacity With 2020 Cut Targets

  • Aims to reduce estimated existing capacity by as much as 13%
  • Slowdown in demand exposed `contradictions and problems'

China will trim the size of its loss-making steel industry by the end of the decade in reforms directed by President Xi Jinping that seek to cut overcapacity and may threaten hundreds of thousands of jobs.

The world’s biggest producer will close between 100 million and 150 million metric tons of annual crude steel capacity by 2020, according to an outline published on the website Thursday of the State Council, the country’s highest administrative body. That’s as much as 13 percent of existing capacity estimated by the China Iron & Steel Association last month at 1.2 billion tons. China’s output, which accounts for about half the world’s production, fell last year for the first time since 1981.

The steel shake-up is a part of supply-side reforms flagged by top leaders including Xi to address overcapacity as the economy moves away from reliance on infrastructure and investment. That shift has crimped demand for basic raw materials, dragging on global prices, and pushed a flood of semi-finished goods like steel into overseas markets. The country last year exported more than Japan produced.

‘Contradictions and problems’

“Even if this cut was over three years it wouldn’t be enough, let alone five years,” said Helen Lau, analyst at Argonaut Securities (Asia) Ltd said by phone from Hong Kong. “It’s not going to help with overcapacity, and steelmakers will be free to produce as much as they want.”

A slowdown in steel demand has exposed “contradictions and problems” in the industry, the State Council said in the statement. “The problem of excess production capacity is particularly prominent, exacerbating the difficulties of managing steel enterprises, while the size and scope of losses has expanded.”

Capacity cuts aim to raise profitability and ease oversupply by shutting loss-making plants and give more market share to the biggest companies. About 400,000 jobs may be lost amid restructuring, a leading official with a state-owned consultancy said in January. CISA members made a net loss of 64.5 billion yuan ($9.8 billion) last year, the group said in January.

— With assistance by Martin Ritchie

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