China cracks down on over capacity. World rejoices.

5 10 2009

China has announced this week that it would deal with over capacity with regards to steel, cement, aluminium, and wind power. At present China is only being mindful that the economic recovery is fragile and hopes to avoid the drastic factory closures and job losses that over capacity could lead to. China’s will to resolve this problem is not new and its pledge to attack the problem is only a reiteration of previous policy goals whose application have not always been consistent.

China’s industrial policy goal for the aluminium sector has for long aimed at consolidating around fewer greener and more efficient facilities while phasing out smaller inefficient smelters. Between 80 and 130 smelters, some of which with nameplate capacity of only 20 000 tonnes per year, are assumed to be in operation in China. The Cabinet repeated pledges announced in May to ban for three years new capacity and to remove small plants scaled at 800,000 tonnes per year or below, according to Reuters. Such a high threshold for nameplate capacity is surprising as no smelters with a capacity above 800 000 tonnes per year has been reported in China by Light Metal Age. A smelter above 800 000 of capacity can only be found in Russia and the Middle East. In sum, the meaning of the Cabinet statement is at best nebulous.

In the case of steel, China has decided to crack down on the 10 per cent output capacity that it deems illegitimate, It has also decided to no longer support new projects or expansion plans of current facilities. Not authorising new projects is not a guarantee that output will be reduced as some regions have illegitimacy approved construction as local authorities are not always following Beijing.

As the targeted industry sectors are energy intensive, the only affected party to China’s decision to reduce industrial output may be Australia who has been benefitting from China’s surge of coal imports. For the countries that have had to set up safeguards, impose corrective tariffs and file WTO cases, this comes as good news. Western steel mills restarting capacity are also benefitting from this move. So is Noranda who just restarted capacity at its Evansville smelter.

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15 12 2009
Not in your League? « Just Digging: a Mining and Metals blog

[…] for such a lack of optimism is the growing production capacity in China. Despite its intention to crack on oversupply, China is self-sufficient in aluminium and will become a net-exporter in the long-term as well. […]

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