China Steel Stimulus Plan – Is It Working?

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Ferrous Metals

Multiple media outlets including MetalMiner have published numerous stories about China’s efforts to stimulate its steel industry. In fact, just today, this Reuters piece specifically mentions the Chinese government seeks a 4% reduction in steel production and a cut of 7.4m tons of pig iron capacity.  Instead of reading the bits and pieces, a client forwarded us this synopsis of China’s entire steel revitalization plan released on March 20. Sorry the link appears in Chinese. The English document can be downloaded here, courtesy of one of our clients!

The gist of the document centers on a few key objectives:

  1. Reduction of steel output, essentially 8% lower than 2008 or 460m tons
  2. Control steel overcapacity; eliminate obsolete capacity
  3. Promote M&A activity and increase industry concentration (e.g. make fewer producers control a larger portion of the market) The specific number the Chinese government would like to see ” 45% market share for the top 5 producers
  4. Rapid improvement of technology level
  5. Develop local innovation and steel utilization (the document specifically calls for 92% of large equipment should be produced locally)
  6. Reduce energy intensity and pollution emissions

Some of these objectives call for additional efforts such as maintain domestic market stability and improve the export environment and preserve stability of iron ore imports and rectify market order. The document even calls for win-win iron ore import pricing systems. All of these noble objectives make perfect sense to both metals industry observers and public policy wonks as well as economic advisors.

The question we must ask, however, relates to how closely has the Chinese government and industry followed the tenets of the strategy? Let’s take a look at a few of these.
On the subject of steel output, according to China Daily, total steel production for March hit 45.1 m tons or about 530m tons annually. That means production still exceeded the target by about 14%. For sure, the Chinese government has made strides to improve the export environment by raising the export tax rebate for high value-add steel products. In terms of controlling overcapacity and removing obsolete capacity, China appears to have developed some specifics around doingthat as this recent article suggests.
But several articles demonstrate that capacity continues to grow with new projects such as this one to add 4.85m tons of capacity per year. Merger and acquisition activity, however appears alive and well as we reported earlier this year. Recent headlines also seem to suggest this element of the plan has moved forward. The evidence appears sparse on the subject of reducing pollution which also ties to technological innovation. Furthermore, we can’t comment on some of the other initiatives but can conclude with this: the proof, as they say, is in the pudding. Time will tell how this plan gets implemented.

Like all governments, the Chinese don’t get all their policies correct. But we’d like to present the most “creative in class” stimulus package we have heard of from any country since this economic crisis began. Any government that mandates its people engage in vices must receive due recognition. Take a look at this story on how local Chinese government officials have received the mandate to ‘light up’. At least aluminum foil manufacturers will see a small boost in demand.

Personally, I’d rather implement a “forced wine drinking” program….

–Lisa Reisman

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