* New guideline targeting overcapacity in industry due soon
* Beijing needs to balance restructuring against job losses
* Uncertainty over even scale of industrial capacity
By David Stanway
BEIJING, June 26 China is set to release new
plans soon to slim down bloated industries from steel to
shipbuilding, but applying measures on the ground will be tough
after years of lax oversight during a stimulus-fueled rush to
expand in Asia's biggest economy.
The new rules, which will also target aluminium, cement and
glassmaking, could be announced within weeks. Despite fairly
resilient demand, all these sectors have been hit by
overcapacity and failure to rein in production gluts could put
more pressure on already weak markets.
The global raw materials sector is buttressed by Chinese
buying and while efforts to streamline industry could make the
long-term outlook more sustainable, they might hit demand. Major
sellers to China of iron ore, coal and other staples include Rio
Tinto, BHP Billiton and Vale.
China's new government is trying to restructure key areas of
the economy, including new efforts to rein in excess credit
growth that has led to asset bubbles.
But in tackling industrial capacity Beijing will be wary of
moving too fast to avoid social strife from excess job losses.
"Solving this problem is going to be extremely hard and it's
going to take a long time, and you can't just expect everything
to change with just one policy," said Li Xinchuang, deputy
secretary general of the China Iron and Steel Association
(CISA), which includes 80 mills accounting for about 80 percent
of China's steel output and is involved in policy discussions.
Beijing has sought to tackle overcapacity in sectors such as
aluminium and steel for about a decade, but plans have faltered
due to resistance from local governments anxious to protect
growth and boost revenues.
In a sign Beijing may be getting more serious, cutting
capacity is becoming a performance target for local officials.
In the past, the central government tended to rely on
quasi-governmental industry bodies like CISA, with limited
formal powers to drive plans through.
There has been little economic or legal incentive for local
authorities or enterprises to comply, and few formal regulations
to determine what projects are legal or not.
The latest plan is likely to seek to block new projects,
push for more mergers and acquisitions and raise targets to shut
old capacity. China was previously committed to closing 7.8
million tonnes of outdated steel and 273,000 tonnes of aluminium
capacity in 2013.
The plan will be supported by steps designed to cut air
pollution in cities by closing or relocating heavy industry.
Beijing has already ordered regional authorities this year
to take action against "blind expansion" by closing illegal
projects, but analysts say it will be wary of causing job losses
in industrial areas like Hebei surrounding the capital.
"They have a lot of heavy industry in Hebei - steel, cement,
glassmaking - and if Hebei has economic problems the workers
could flee to Beijing," said Henry Liu, an analyst with Mirae
Asset Securities in Hong Kong.
China's steel industry, the world's biggest with a capacity
to produce about 1 billion tonnes, is now estimated by CISA to
have about 300 million tonnes of surplus production capacity, or
around 40 percent of 2012 output.
Shipbuilding in China had by 2010 an annual production
capacity that was equivalent to total world demand and has
continued to grow even with a drop in construction and orders.
What is required, say some, is not new policies, but better
While Beijing has run inspection campaigns or issued orders
to force provinces to shut down plants and push mergers, sectors
like steel and aluminium have largely existed in a legal limbo.
Until the industry ministry published its first registries
of approved steel and aluminium producers in March, even Jiangsu
Shagang Group, China's biggest private steel firm and fifth
biggest overall, had no authorisation to produce at all.
In the case of aluminium, the Nonferrous Metals Industry
Association estimates there was more than 7 million tonnes of
idle capacity last year, a third of China's output, and capacity
is expected to reach 40 million tonnes by 2015, nearly double
the 24 million-tonne target set in an industry five-year plan.
Industry sources said smelters have come under pressure to
stop projects in the far northwestern region of Xinjiang, a
centre for the aluminium industry, and that more than 10 million
tonnes of new capacity could be blocked.
But while China has found it easier to control big projects
by encouraging state-backed enterprises like Baoshan Iron and
Steel to cut capacity before new projects are built,
small private projects have proved harder to curb.
Beijing has said it will use new pollution and
environmental standards to block construction of new industrial
projects in major cities, and is eyeing targets to reduce coal
use in some heavily polluted regions.
"If they can deal with this problem it can kill two birds
with one stone. You can help improve the structure of industry
and ease pollution," said Huang Wei, a Greenpeace campaigner in
But it is hard even to estimate how much capacity there
actually is, and therefore how much needs to be cut.
Hebei has said it aimed to cut total steel capacity by 60
million tonnes by 2020, but estimates of total capacity range
anywhere from 300 to 400 million tonnes.
"The fact is nobody really knows what Hebei's exact steel
capacity is right now," said Huang.