5 august 2016

News Analysis: Higher coal, steel prices challenge China's mission to cut capacity

Source: Xinhua 2016-08-05
BEIJING, Aug. 5 (Xinhua) -- Chinese authorities are alarmed by the slow progress in reducing overcapacity in the coal and steel industries as a temporary market recovery impeded efforts to shut down production.

An inter-ministerial meeting held Thursday urged stronger efforts to press ahead with the capacity cuts. Inspection teams will be sent to local governments to oversee the work starting in mid-August, the People's Daily reported Friday.

In the first seven months of the year, China only achieved 38 and 47 percent of this year's reduction targets for the coal and steel sectors, respectively, official data showed.

Some local governments and companies have wavered in cutting capacity due to increases in steel and coal prices in recent months, said Xu Shaoshi, head of the National Development and Reform Commission (NDRC), the country's top economic planner.

"We must be cool-headed about it," Xu said at the meeting, attributing the price upticks to expectations for lower supply and warning that excessive capacity remains huge in the two sectors.

China is the world's largest producer and consumer of steel and coal. The two industries have long been plagued by overcapacity and felt the pinch even more in the past two years as the economy cooled and demand has fallen.

However, coal and steel prices have risen in the past few months amid temporarily strained supply as some producers scaled back output to avoid losses.

The price of a popular coal product rose by 30 yuan (about 4.5 U.S. dollars) in the first six months to 400 yuan per tonne at the beginning of July, while the composite steel price index increased by 11 points to 67.83 points, according to data from the NDRC.

As prices picked up, some coal mines and steel plants quietly resumed production and were reluctant to close down, speculating that business could turn around, an industry insider told Xinhua on condition of anonymity.

For example, monthly crude steel output has returned to growth since March, with the daily average output hitting record highs in April and June.

Both analysts and officials said the recovery is unsustainable.

"The price increases were just the result of a short-term mismatch between supply and demand," said Xu Xiangchun, an analyst with, a Shanghai-based steel information service provider. "It cannot hide the fact that the coal and steel market remain seriously oversupplied."

In the first half of the year, China's steel consumption dropped 2.7 percent year on year while coal consumption fell 5.1 percent, showing that there is no basis for sustained price increases, said NDRC's Xu Shaoshi at Thursday's meeting.

"We should stand firm and not to be disrupted by price fluctuations in working to reduce overcapacity, or else the two industries will face more trouble," he said.

Officials at Thursday's meeting demanded local authorities clearly define responsibilities and fulfill the reduction targets without delay or compromise.

Local governments were ordered not to allow any new projects that would expand steel or coal capacity. They were also required to protect the legitimate interests of all employees who are redundant.

China plans to cut steel and coal capacity by about 10 percent -- as much as 150 million tonnes of steel and half a billion tonnes of coal -- in the next few years, with 100 billion yuan in funds set aside to help displaced workers

For this year, the government aims to pare steel production capacity by 45 million tonnes and shave off coal capacity by 250 million tonnes.

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