Why should Indian metal producers be excited by the Chinese administration's recently announced resolve to do away with the economy's addiction to credit, which rose by $14 trillion to $23 trillion in the past five years? In the process, China is suffering from credit exhaustion, as fresh output created by every extra unit of credit fell from a ratio of 0.85 in 2008 to about 0.2.
Our industry officials believe extraordinarily high rates of credit growth, leading to credit exhaustion, is the reason Chinese Prime minister Li Keqiang initiated steps to ration credit to industries nursing large overcapacity, which has proved to be a drag on the economy. All economic policy moves by Beijing are watched closely in India and elsewhere, as China's astonishingly large production of commodities from steel to ferroalloys to aluminium, as well as their exports, have a significant bearing on world prices. Globally, there was no respite from the commodities production and capacity building in China during and after the breakout of the global economic crisis in 2009.
"No doubt China will continue to need lots of steel, as it once again gets into high gear of infrastructure building. Even then, a neighbour owning close to a billion tonnes (bt) of steel capacity, with a share of 46.3 per cent in global production of the metal last year, would require us to be watchful of its export moves," says Steel Authority of India Limited Chairman Chandra Shekhar Verma. While premier Li has set a lower "bottom line" of seven per cent economic growth, Beijing is kicking off a host of new infrastructure projects, including the world's longest undersea tunnel across the Bohai strait, at a cost about $45 billion. China would need huge quantities of steel and other metals to give shape to its new railways and infrastructure schemes, Verma says.
move to cut by one per cent the aluminium capacity of 27 mt by the year-end, as local demand is about 21 mt. Cement capacity phasing-out would stand at 92 mt. China, the world's largest cement producer, has built enormous capacity of three bt, against local demand of 2.2 bt.
There is speculation on the chances of the new capacity curb initiative succeeding, as similar efforts in the past yielded poor results, bringing ridicule to Beijing. According to People's Daily, Beijing's earlier moves to rein in "blind capacity expansion" was virtually a cropper in the face of local governments offering a slew of incentives---from cheap land to tax breaks---to attract investment. Reuters cites the example of the aluminium industry, in which only 8,00,000 tonnes of the new capacity of 18 mt created in recent years had the sanction of the central government. Similarly, provincial authorities have, so far, managed to ignore central edicts to shut factories in their backyards. But unlike the vagueness of past central disciplining moves, Beijing's present capacity downsizing order has to be read in conjunction with a commitment to a healthier form of growth. Li is focusing on a new set of reforms and restructuring of the economy. This time, what is not to be missed is the central government precisely earmarking the units to be taken off the production line; it is unlikely provincial satraps would have the gumption to disregard such fiats.
Moreover, to make sure the plan works, Beijing retains the option to deny credit to the units it wants to shut. The strict operational standards Beijing has set for the aluminium industry, also to be applied to steel and cement, would hopefully restrain capacity use. But Li's capacity-chopping plan has failed to make an impact on commodities markets. This is because China would still have considerable surplus capacity in all the 14 industries. What is not to be overlooked is many of the units earmarked for closure are already idle and every industry has much surplus capacity. So, the possibility of cheap (read subsidised) metal exports from China would remain, in the short to medium term.
Verma and Das would have to stay on guard on Chinese export incursions.
A LOWLY CUT
|China Iron and Steel Association estimates the country's surplus steel capacity at 300 mt
|China, the world's largest cement producer, has built enormous capacity of three bt, against local demand of 2.2 bt
|China has identified 1,400 companies that must, by September, idle outdated, energy-wasting capacity
|For China, which produced 716.5 mt of crude steel last year, a capacity cut of 7.81 mt is neither here nor there
Our industry officials believe extraordinarily high rates of credit growth, leading to credit exhaustion, is the reason Chinese Prime minister Li Keqiang initiated steps to ration credit to industries nursing large overcapacity, which has proved to be a drag on the economy. All economic policy moves by Beijing are watched closely in India and elsewhere, as China's astonishingly large production of commodities from steel to ferroalloys to aluminium, as well as their exports, have a significant bearing on world prices. Globally, there was no respite from the commodities production and capacity building in China during and after the breakout of the global economic crisis in 2009.
"No doubt China will continue to need lots of steel, as it once again gets into high gear of infrastructure building. Even then, a neighbour owning close to a billion tonnes (bt) of steel capacity, with a share of 46.3 per cent in global production of the metal last year, would require us to be watchful of its export moves," says Steel Authority of India Limited Chairman Chandra Shekhar Verma. While premier Li has set a lower "bottom line" of seven per cent economic growth, Beijing is kicking off a host of new infrastructure projects, including the world's longest undersea tunnel across the Bohai strait, at a cost about $45 billion. China would need huge quantities of steel and other metals to give shape to its new railways and infrastructure schemes, Verma says.
More From This Section
Would it not be comforting for Verma and National Aluminium Company Chairman Ansuman Das, who wants China to lead in aluminium production discipline, to know under instructions from Li, the Chinese ministry of industry and information technology has identified 1,400 companies that must, by September, idle outdated, energy-wasting and environment-damaging capacity and to do away with that by 2013-end? Certainly, this would have been the case if the first instalment of the recommended capacity cut across 19 industries - from steel to cement - had some depth. Examples of proposed steps in steel and aluminium would underline the point. For a country that had a share of 716.5 million tonnes (mt) of global crude steel production of 1.5b bt last year and which, in the first half of this year, raised output by 7.4 per cent to 3,89,870 mt, a capacity cut of 7.81 mt is neither here nor there. China Iron and Steel Association estimates the country's surplus steel capacity at 300 mt. Also, not much is to be read in the
move to cut by one per cent the aluminium capacity of 27 mt by the year-end, as local demand is about 21 mt. Cement capacity phasing-out would stand at 92 mt. China, the world's largest cement producer, has built enormous capacity of three bt, against local demand of 2.2 bt.
There is speculation on the chances of the new capacity curb initiative succeeding, as similar efforts in the past yielded poor results, bringing ridicule to Beijing. According to People's Daily, Beijing's earlier moves to rein in "blind capacity expansion" was virtually a cropper in the face of local governments offering a slew of incentives---from cheap land to tax breaks---to attract investment. Reuters cites the example of the aluminium industry, in which only 8,00,000 tonnes of the new capacity of 18 mt created in recent years had the sanction of the central government. Similarly, provincial authorities have, so far, managed to ignore central edicts to shut factories in their backyards. But unlike the vagueness of past central disciplining moves, Beijing's present capacity downsizing order has to be read in conjunction with a commitment to a healthier form of growth. Li is focusing on a new set of reforms and restructuring of the economy. This time, what is not to be missed is the central government precisely earmarking the units to be taken off the production line; it is unlikely provincial satraps would have the gumption to disregard such fiats.
Moreover, to make sure the plan works, Beijing retains the option to deny credit to the units it wants to shut. The strict operational standards Beijing has set for the aluminium industry, also to be applied to steel and cement, would hopefully restrain capacity use. But Li's capacity-chopping plan has failed to make an impact on commodities markets. This is because China would still have considerable surplus capacity in all the 14 industries. What is not to be overlooked is many of the units earmarked for closure are already idle and every industry has much surplus capacity. So, the possibility of cheap (read subsidised) metal exports from China would remain, in the short to medium term.
Verma and Das would have to stay on guard on Chinese export incursions.
A LOWLY CUT
|China Iron and Steel Association estimates the country's surplus steel capacity at 300 mt
|China, the world's largest cement producer, has built enormous capacity of three bt, against local demand of 2.2 bt
|China has identified 1,400 companies that must, by September, idle outdated, energy-wasting capacity
|For China, which produced 716.5 mt of crude steel last year, a capacity cut of 7.81 mt is neither here nor there