Is China Finally Getting to Grips with Over Capacity in the Metal Sector?

After several years of talking about curtailing excess capacity, it would appear the Chinese authorities are finally getting serious about it. The Ministry of Industry and Information Technology said on Thursday of last week.

China has said it will close a total of 300,000 tons of copper smelting capacity, 600,000 tons of lead and zinc capacity, 800,000 tons of aluminum capacity and millions of tons of steel capacity under a three-year plan intended to reduce overcapacity and cut down pollution. China has pledged to cut the amount of carbon dioxide produced from each unit of economic growth by 40-45% by 2020, compared with the 2005 level. Closing old excess capacity serves that purpose at the same time as bringing capacity in line with demand for many metals. This year, Beijing’s target is to shut down outdated capacity of 339,000 tons of aluminum, 117,000 tons of copper smelting, 113,000 tons of zinc and 243,000 tons of lead, according to a Reuters report in ChinaMining.

For some metals the numbers are significant. Although 339,000 tons of aluminum doesn’t make much of a dent on an estimated 20m tons of capacity it could reduce what is clearly a state of over production at the moment. Of more profound impact could be lead. A reduction of 243,000 tons of capacity from a market that globally is in surplus by just 168,000 tons per year according to the ILZSG quoted in Reuters would have a significant impact on China’s demands on global supplies.

The devil will be in the detail however as many issues in the report remain opaque. A Reuters report states Chalco (Aluminum Corp of China) has asked Beijing for approval to add 250,000 tons of primary capacity at its Pingguo plant in Guangxi currently producing 140,000 tons. Whether the authorities will give their approval is uncertain however as it flies in the face of recent announcements that no new capacity is to be added for three years. Smelters have however been given permission to buy power directly from generators to cut costs and there are rumors that semi’s producers could see VAT rebates increased on exports increased to the full 17%, which would be consistent with the authorities attempts to support value add production but suppress further investment in primary production across a range of metals products.

It would appear the authorities have been buying metals for stock again, as a continuation of last year’s dramatic intervention by the State Reserves Bureau. A spokesman for the state owned research group Antaike said the three year reserve plan was to buy one million tons of aluminum, 400,000 tons of copper and 400,000 tons of lead and zinc from domestic smelters. Apparently the State Reserves Bureau has already bought 590,000 tons of aluminum and 159,000 tons of zinc since December. At least some of China’s vociferous appetite for metals is not going into consumption but into state stocks. Unlike speculative trade stocks there is no danger these will come back out into the market if prices turn or demand falters but it does mislead superficial impressions of continued high consumption rates real consumption is clearly not quite as strong as it appears.

No wonder the authorities are keen to cut excess capacity and drive some consolidation into what has been a fragmented and undisciplined domestic market before cooling growth rates meet yet higher levels of over capacity and results in a general price collapse.

–Stuart Burns

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