China Ministry Edicts Will not Dent Capacity Growth

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Recent press coverage of moves by the Ministry of Industry in China to close energy intensive production capacity should not be confused with a reduction in overall output. Beijing gave an undertaking to reduce the consumption of electricity per unit of GDP by 20% and to cut the output of carbon dioxide per unit of GDP by between 40 and 45% of 2006 levels by 2020. Announced closures of steel, aluminum, cement and other energy intensive materials have nothing to do with profitability and everything to do with Beijing reaching targets it has gone on record as setting.

Back in May ,the State Council asked local governments to ensure targets for cutting overcapacity and pollution were met by the third quarter as electricity rebates were withdrawn for aluminum producers and environmental standards were introduced for steel makers. But Beijing has been forced into taking further steps as energy used per unit of GDP rose 0.09% in the first six months from a year earlier. In the first four years, the reduction was 14.4% according to a Bloomberg report.

The Ministry of Industry and Information Technology ordered a total of 2,087 companies that produce steel, coal, cement, aluminum and glass have to “close their old and obsolete facilities by the end of September ManufacturingDigital.com reported. The Ministry  even named companies like Chalco’s Shandong Aluminium Co should close a 20,000 ton facility from a total of 120,000 tons. The Chalco group had identified as being unacceptably inefficient, some 3% of their total capacity. Numerous steel mills, both household names and smaller private firms must close older plants. Handan Iron & Steel Group, a unit of Hebei Steel, China’s largest steel maker, has been ordered to close three steel converters, which have combined capacity of 900,000 tons. While Chengde Xinxin Vanadium and Titanium Co. and Xuanhua Iron & Steel Co., two other units of Hebei Steel, should shut furnaces with a combined capacity of 700,000 tons.

But such plant closures should be measured against the continued expansion of the wider industry as new plants are bought on stream. China is expected to add about 3 million tons of annual aluminum smelting capacity this year according to an earlier Bloomberg article, so 120,000 tons of older, more costly capacity is, if anything, simply going to stimulate the addition of new lower cost production capacity benefiting from the economies of scale associated with large new plants. In this way, the government’s targets may still be met as the energy consumption and CO2 emissions will both be reduced per unit of GDP but both GDP and production volumes will continue to rise.

Anyone looking at these latest edicts by the Ministry as being part of a wider curbing of production capacity should think again. Only profitability will impact overall production volumes and for base metals the recent price rises in the third quarter have put smelters back in the black, steel mills have been running profitably for the last 12 months.

–Stuart Burns

Comments (2)

  1. Paul Adkins says:

    “…for base metals the recent price rises in the third quarter have put smelters back in the black…” Barely. The current selling price is sitting at around RMB15,500, having dropped as low as RMB14,450 just a few weeks ago. But the cash cost of production is currently sitting at RMB15,500, and the pressure is upward, not downward. Further preference pricing structures for electricity were removed again this week. In Henan province, for instance, smelters buying electricity from the grid (most of them) are now paying RMB0.63 per kwh. That’s more than US$90 per mwh.

    Nevertheless, the main thrust of your piece is somewhat accurate. In point of fact, old inefficient smelters have been given until September 2011 to close, which is why you won’t see any smelters in the list of companies that were named yesterday. Many, though not all, are rapidly rebuilding their lines to run higher amperage, as the edict nominates 100 kA as the cutoff point.

    Generally, the aluminium industry is shifting west, to areas like Gansu, Qinghai, Ningxia and Inner Mongolia, where electricity is much cheaper. Take Shandong Xinfa Aluminium for instance. Their new smelter in Xinjiang province pays US$14 per mwh. No wonder they are planning to grow to 3.5mmt by the end of 2012.

    The reason for all this economic stridentness? The 11th 5-year plan is about to come to an end. Perhaps that is why many of the people affected by the order to close have been told to wait until the new year, when the Government will resume pumping infrastructure development.

  2. Chuin-Wei Yap says:

    Stuart, astute as always.

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