Xinhua Insight: China's steel industry strives to tackle overcapacity

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Added On March 9, 2016

BEIJING, March 9 (Xinhua) -- When Zhou Jiangtao joined Ansteel Heavy Machinery Co. Ltd, he expected the life of stability and good salary traditionally guaranteed by state-owned companies.

So when the company started laying off workers in late 2015, it took a while for the 38-year-old worker to adjust.

"Factories were barely rolling because there were very few orders for steel products," Zhou said. "Some of us chose to find new jobs, some just retired in advance."

China's steel enterprises are experiencing severe economic stress as factories halt production and workers are laid off.

The Purchasing Managers' Index of the steel industry reached 49 in February, the 22nd month it stood below 50, according to the Steel Logistics Professional Committee. A reading above 50 indicates expansion, while a reading below that level signals contraction.

Sagging demand has already impacted China's steel industry. The State Council, China's Cabinet, announced earlier last month that crude steel production capacity will be slashed by 100 million tonnes to 150 million tonnes over the next five years.

The situation is so severe that the government predicts some 500,000 workers in the industry will be laid off.

In Tangshan Songting Iron & Steel Co. Ltd (TSIS), one of the country's biggest steel makers in northern Hebei Province, six huge blast furnaces sit deserted, with only a few workers looking after the quiet factories.

The company halted production in November last year, with more than 6,000 workers forced to stay idle. According to the Futures Daily, TSIS reported 474 million yuan (73 million U.S. dollars) in losses in the first nine months of 2015.

The company failed to pay 97 million yuan in electric bills, according to an article in the National Business Daily.

In Hebei's Tangshan City, the heartland of China's steel production, 14 out of 32 local steel makers reported a debt to assets ratio of at least 70 percent, according to a survey by the Tangshan Steel Association in late 2015, higher than the national average of 69.32 percent.

"A lot of steel makers will be wiped out of the market once their capital chains are broken," said Zhang Pin, a researcher with the Tangsong Steel Economic Research Institute.

EXCESS CAPACITY

For years, China remained the world's biggest steel producer, but its capacity is growing too large.

In Tangshan, where local authorities relied on the steel industry to bolster economic growth, steel production increased to 105 million tonnes in 2014 from 59 million tonnes in 2008, higher than all of Europe combined, according to the local steel association. Tangshan is home to China's biggest steel production base.

The boost to economic growth has driven many enterprises in the city to jump on the steel bandwagon, with scores of blast furnaces constructed. In 2012 alone, 18 new furnaces were built, contributing to 23.3 million tonnes of added capacity, according to the China Iron and Steel Association (CISA).

But demand for steel is sagging. According to statistics released by research company Rhodium Group, global steel production increased 57 percent from 2004 to 2014, with China contributing 91 percent to that growth.

In 2015, China produced about 804 million tonnes of crude steel, but only 664 million tonnes of steel products were consumed last year, according to the government-led agency China Metallurgical Planning and Research Institute.

"China has an annual capacity of making about 1.15 billion tonnes, but only about 800 million tonnes are produced each year," said steel researcher Qiu Yuecheng. "The utilization rate is less than 70 percent."

"There are simply too many companies making steel," said an industry insider, who declined to give his name.

Prices for steel also fell to 1,500 yuan per tonne in 2015. In its heyday, steel prices fetched a staggering 5,600 yuan per tonne.

Member steel makers of the CISA suffered losses of 64.534 billion yuan in total in 2015, the association announced in February. Many steel makers have even become "zombie companies" - businesses that make no money and but are kept alive only with aid from the government and banks.

FINDING A WAY OUT

As urgency for change mounts, authorities are taking action to tackle the obsolete capacity.

In Hebei, for example, authorities will slash steel capacity by 40 million tonnes by the end of 2017.

The State Council said that no new steel projects will be licensed, outdated plants will be closed, and "zombie" companies eradicated.

As for the workers made redundant, many companies have chosen to "relocate" their employees.

In northwest China's Xinjiang Uygur Autonomous Region, for instance, the 65-year-old Bayi Steel Company has set up a public cleaning and security company to digest more than 2,000 laid-off workers who were relatively old and not skillful enough for other jobs. Female workers have been turned into cleaners while males became security guards.

It also seeks to upgrade by investing in a green building company, which helps boost the sales for high value-added products, and creates sales jobs for young and capable steel workers.

To cushion the effect of job losses on families and society, the central government will allocate 100 billion yuan over two years to help the laid-off workers find new jobs.

The process to cut overcapacity won't be easy, said Li Xinchuang, head of the China Metallurgical Planning and Research Institute. Li said that the United States, Japan and Europe spent decades tackling overcapacity, but "our task is much more challenging.

He added that China should encourage the development of competitive companies "with the ability to compete on the global stage."

"Cutting capacity might cause some economic pain," Li said. "But it will be pain worth having, in the long run."