19 August 2019

Li wages war against industrial overcapacity

In his first government work report delivered on Wednesday, Premier Li Keqiang stressed the need to eliminate excess capacity and the importance of structural reform.

Hong Kong Economic Journal’s EJ tactics column discusses some of the salient points in this portion of the premier’s report.

Li acknowledged the role of market forces in fighting industrial overcapacity. Mergers and acquisitions will be encouraged to squeeze out less efficient players. Standards on environmental protection and energy consumption as well as other technical requirements will be tightened. Concessionary measures given to sectors with serious overcapacity problems will be terminated.

He also pledged to cut 27 million metric tons of iron and steel production capacity, 42 million tons for cement and 35 million standard-sized container boxes of flat glass by the end of 2014, a year ahead of the original deadline for meeting the targets.

The Ministry of Industry and Information Technology earlier urged all provincial heads to hand in by the end of this month their proposals on the structural reform of the cement and flat-glass industries for 2013-2017, along with their proposed punitive measures for those violating the rules in the two sectors.

Hebei is a major production base for cement, which is a highly polluting industry and whose production process consumes a lot of energy. In fact, the province gets most of the blame for Beijing’s worsening smog problem.

As such, Hebei will play a key role in the efforts to eliminate overcapacity. It has to cut 60 million tons of cement capacity by 2017, while Jiangsu and Jiangxi will have to reduce theirs by 10 million tons and five million tons respectively.

In the steel sector, Maanshan Iron and Steel Co. Ltd. (00323.HK) is but one of the major companies that will be affected by the reform drive. The company’s subsidiary in Hefei has been asked to return a plant site to the local government by October, and will receive a compensation of at least 1.2 billion yuan (US$196.3 million) to cover the loss from the write-down of the asset. The move is likely to set a precedent for similar cases.

The Hefei plant closure will affect some 5,000 personnel, some of whom are expected to be transferred to other units of the parent company, while the rest may receive training for other jobs.

Citigroup Inc. has lowered its earnings estimates for Maanshan Steel by 20 to 71 percent for 2013-2015 to reflect the drop in sales and staff relocation expenses.

Despite all the negative impact, the columnist believes that efforts to eliminate overcapacity will bring more good than harm in the long run. The reform drive may only be the darkness before dawn and the affected industries will rise again in two to three years.

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Freelance journalist

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