20-03-2014, 09:12 PM
China's steel crackdown has just begun
Lisa Murray and Angus Grigg
788 words
15 Mar 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Mill closures
More cuts will come in Beijing's war on overcapacity.
Shanghai It was a tale of Christopher Skase proportions.
With his small, privately owned steel mill in central China on the brink of collapse last June, Dong Jianle evaded creditors and bank managers lurking around his office, turned off his mobile phone and fled in the middle of the night.
It didn't take long for news of the escape to hit the mahjong tables and tea houses of Pingxiang, a green and hilly city of 1.8 million people about 1000 kilometres west of Shanghai. The very next day, the rusty gates of the Pingxiang Special steel mill were bolted shut, as it became one of the first victims of China's war on overcapacity.
In the weeks leading up to Dong's escape, the People's Bank of China engineered a credit crunch, sending a strong signal to the market that the easy money for unprofitable businesses had dried up. As a result, Dong failed to refinance his loans and keep the mill afloat.
At the same time, the State Council, China's cabinet, released a list of rules for the banking sector, which included the prohibition of any new loans to industries suffering overcapacity.
Nine months later, Dong has been forced by government officials to return to Pingxiang but the gates of his steel mill are still shut. And last week, Premier Li Keqiang indicated there will be many more closures to follow.
As rumours spread that other highly leveraged steel mills were cutting back on production and the price of iron ore plunged to an 18-month low, Li made it clear the government would not be coming to the rescue.
On the contrary, in his annual speech to Parliament, he said 27 million tonnes of outdated capacity would be shut down this year alone.Ambitious target
Over the next three years, the target is even more ambitious. In the steel-making province of Hebei, the government plans to close 60 million tonnes of capacity, which is 30 per cent of its entire annual production and 10 times Australia's total steel production last year.
It is understood the cuts have been allocated to steel mills already but are awaiting approval from the State Council. "We will ensure. . . that these reductions are permanent and such production capacity does not increase again," Li told Parliament last week.
China has been talking about cracking down on overcapacity for the past decade but the new government under Li and President Xi Jinping is finally starting to introduce concrete policies.
If there was any doubt about the government's resolve, it was cleared up by China's top banking regulator during a press conference on Tuesday.
Shang Fulin, chairman of the China Banking Regulatory Commission, said stricter credit policies would be one of the main weapons for restructuring the steel sector. Some small, inefficient steel mills faced closure, he said. And he also revealed the government had introduced a green filter for assigning credit to mills. "As for high polluting, high energy-consuming enterprises, we have an environmental assessment veto," he said. "If the environmental assessment does not meet with requirements, the bank will not provide loans."Drawn out process
The main reason most analysts predict the iron ore price could fall below $US100 ($111) a tonne this year is a combination of slowing steel demand in China and a big increase in iron ore supply out of Australia.
Between the fourth quarter of last year and the first three months of this year, growth in Chinese steel demand has nearly halved to around 5 per cent. At the same time, Australia is expected to export an additional 100 million tonnes of iron ore, about 16 per cent more than last year.
And it's not just the private steel mills in China feeling the pinch. In Pingxiang, at the state-owned steel mill down the road from Dong's idle plant, staff are being paid just 80 per cent of their salary. The clean-up of China's steel sector is going to be a long and drawn out process. National government policy is complicated by the competing agendas of local officials who want to avoid the loss of jobs and tax revenue.
Dong's mill in Pingxiang, for example, is not officially closed. According to local scrap steel traders owed money by the businessman, he is still in talks with the banks and potential private investors with a view to reopening the mill.
But even in the unlikely event that Dong reopens his mill, plenty of others will shut.
Fairfax Media Management Pty Limited
Document AFNR000020140314ea3f00010
Lisa Murray and Angus Grigg
788 words
15 Mar 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Mill closures
More cuts will come in Beijing's war on overcapacity.
Shanghai It was a tale of Christopher Skase proportions.
With his small, privately owned steel mill in central China on the brink of collapse last June, Dong Jianle evaded creditors and bank managers lurking around his office, turned off his mobile phone and fled in the middle of the night.
It didn't take long for news of the escape to hit the mahjong tables and tea houses of Pingxiang, a green and hilly city of 1.8 million people about 1000 kilometres west of Shanghai. The very next day, the rusty gates of the Pingxiang Special steel mill were bolted shut, as it became one of the first victims of China's war on overcapacity.
In the weeks leading up to Dong's escape, the People's Bank of China engineered a credit crunch, sending a strong signal to the market that the easy money for unprofitable businesses had dried up. As a result, Dong failed to refinance his loans and keep the mill afloat.
At the same time, the State Council, China's cabinet, released a list of rules for the banking sector, which included the prohibition of any new loans to industries suffering overcapacity.
Nine months later, Dong has been forced by government officials to return to Pingxiang but the gates of his steel mill are still shut. And last week, Premier Li Keqiang indicated there will be many more closures to follow.
As rumours spread that other highly leveraged steel mills were cutting back on production and the price of iron ore plunged to an 18-month low, Li made it clear the government would not be coming to the rescue.
On the contrary, in his annual speech to Parliament, he said 27 million tonnes of outdated capacity would be shut down this year alone.Ambitious target
Over the next three years, the target is even more ambitious. In the steel-making province of Hebei, the government plans to close 60 million tonnes of capacity, which is 30 per cent of its entire annual production and 10 times Australia's total steel production last year.
It is understood the cuts have been allocated to steel mills already but are awaiting approval from the State Council. "We will ensure. . . that these reductions are permanent and such production capacity does not increase again," Li told Parliament last week.
China has been talking about cracking down on overcapacity for the past decade but the new government under Li and President Xi Jinping is finally starting to introduce concrete policies.
If there was any doubt about the government's resolve, it was cleared up by China's top banking regulator during a press conference on Tuesday.
Shang Fulin, chairman of the China Banking Regulatory Commission, said stricter credit policies would be one of the main weapons for restructuring the steel sector. Some small, inefficient steel mills faced closure, he said. And he also revealed the government had introduced a green filter for assigning credit to mills. "As for high polluting, high energy-consuming enterprises, we have an environmental assessment veto," he said. "If the environmental assessment does not meet with requirements, the bank will not provide loans."Drawn out process
The main reason most analysts predict the iron ore price could fall below $US100 ($111) a tonne this year is a combination of slowing steel demand in China and a big increase in iron ore supply out of Australia.
Between the fourth quarter of last year and the first three months of this year, growth in Chinese steel demand has nearly halved to around 5 per cent. At the same time, Australia is expected to export an additional 100 million tonnes of iron ore, about 16 per cent more than last year.
And it's not just the private steel mills in China feeling the pinch. In Pingxiang, at the state-owned steel mill down the road from Dong's idle plant, staff are being paid just 80 per cent of their salary. The clean-up of China's steel sector is going to be a long and drawn out process. National government policy is complicated by the competing agendas of local officials who want to avoid the loss of jobs and tax revenue.
Dong's mill in Pingxiang, for example, is not officially closed. According to local scrap steel traders owed money by the businessman, he is still in talks with the banks and potential private investors with a view to reopening the mill.
But even in the unlikely event that Dong reopens his mill, plenty of others will shut.
Fairfax Media Management Pty Limited
Document AFNR000020140314ea3f00010