China looks overseas in bid to slim down bloated steel sector

[BEIJING] As part of efforts to ease domestic steel and coal overcapacity, widely blamed for triggering a global industry crisis, China said it will do more to help its firms shift capacity overseas while keeping tight control on adding new capacity at home.

A joint statement issued by the central bank and several other government bodies on Thursday said China would "strengthen financing support for enterprises 'going out'", and use loans, export credits and project financing to encourage coal and steel businesses to build capacity abroad.

At the same time, it would strictly control credit available for new capacity additions in China.

It was unclear whether this signals government encouragement for more coal and steel exports from China, which has been widely blamed for dumping its excess steel on world markets, depressing prices and threatening thousands of jobs. Beijing says it has done what it can on overcapacity, and the criticism is "lazy protectionism."

Earlier this week, China and other major steel producers failed to agree on measures to tackle the overcapacity crisis, prompting the United States, European Union and others to call for urgent action.

"I am cautious about China's move to shift overcapacity overseas as this doesn't help, and just replaces exports," said Jiang Feitao, a steel researcher with the China Academy of Social Sciences.

Japan, another big steel producer, expressed concern over rising Chinese crude steel production and exports.

"We're not sure if the rise is because of a recovery in demand after Chinese New Year or resumptions of production by local mills in the face of higher steel prices. We need to closely look at China's output and exports in April," Koji Kakigi, chairman of the Japan Iron and Steel Federation, told a news conference in Tokyo.

While China has engineered some steel capacity cuts, its efforts risk being undermined by a sharp rise in domestic steel prices that has seen mills ramp up output. Even "zombie" mills, which had stopped production but were not closed down, have been resurrected.

Chinese steel prices have risen by 77 per cent so far this year, as supplies tightened following plant shutdowns last year, consumers restocked and seasonal demand picked up.

On Thursday, steel futures in China jumped nearly 9 percent to their highest since September 2014. The price of rebar used in construction for October delivery on the Shanghai Futures Exchange rose to as much as 2,787 yuan (S$577.74) a tonne. Iron ore futures on the Dalian Commodity Exchange also rose to 19-month highs.

Steel product inventories held by Chinese traders have fallen by more than a quarter from last year's levels, said Helen Lau, an analyst at Argonaut Securities. "Therefore, we are of the view that steel prices may extend their rally through to the second quarter."

Chinese steel firms have already ventured abroad, building plants in South Africa and Eastern Europe.

Hebei Iron & Steel Group this week signed a 46 million euro (S$69.98 million) deal to buy a loss-making Serbian steel plant, and pledged to invest US$300 million in the plant, which employs more than 5,000 workers.

China plans to shed 100-150 million tonnes of domestic crude steel capacity in the next five years, and another 500 million tonnes of surplus coal production, in a bid to tackle huge capacity overhangs that have saddled domestic firms with losses and debts.

The government has earmarked 100 billion yuan to handle layoffs, and is promising measures to deal with the debt problem.

Thursday's statement said the government would speed up the handling of non-performing loans in the debt-ridden sectors, and extend direct financing to support their restructuring. It would also work to deal with possible default risks in the two sectors.

Banks would use a wide range of methods, including debt restructuring and bankruptcy settlements, to handle the problem, it said.

REUTERS