China vows to crack down on industrial overcapacity

BEIJING Wed Sep 30, 2009 2:29am EDT

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BEIJING (Reuters) - China's cabinet has laid out detailed plans to curb overcapacity in industries such as steel, aluminum, cement and wind power, warning that the country's economic recovery could otherwise be hampered.

In a reiteration of existing policy targets, the State Council said meeting the government's long-standing goal of reducing overcapacity was urgent because the result of inaction would be factory closures, job losses and rising bad bank loans.

"What especially requires our attention is that it is not only traditional industries such as steel and cement that suffer from productive overcapacity and are still blindly expanding," it said in a notice posted late on Tuesday on www.gov.cn.

While highlighting overcapacity in sectors such as steel and cement -- both energy-guzzling and polluting --, it also aimed at new industries such as wind power equipment and silicon.

For the steel industry, the government toughened its tone by calling some 10 percent of the country's crude steel capacity illegitimate, but did not elaborate what it would do about it. China is the world's biggest steel producer and consumer.

"There is 58 million tonnes of crude steel capacity under construction, most of which is illegitimate. Crude steel capacity could exceed 700 million tonnes and overcapacity will intensify if curbs are not implemented in time," it said.

The cabinet said it would no longer approve or support any new steel projects or any expansion in existing projects.

Analysts said the immediate casualty of the clamp-down could be Australia's coking coal sector, whereby exports to China have surged more than 10-fold from a year ago to reach 14 million tonnes in the first eight months of this year.

"The policy would support our view that the surge in China's coal imports over the past few months will be short-lived. From an Australian perspective, we could be seeing some degree of a pullback over the coming months," said Clyde Henderson, a coal analyst at Wood Mackenzie consultancy in Sydney.

"But still, many other steelmakers elsewhere are now looking to restart their capacity, so that will compensate for softer demand in China."

China has recently emerged as a net importer of coking coal, in part driven by the closure of small and unsafe mines at home. The surge in Chinese demand has also helped hard coking coal prices to rebound by some 30 percent since December to around $150-$160 a tonne in the spot market.

By 2011, blast furnaces with a capacity of 400 cubic metres or less, and rolling furnaces and electric furnaces with a capacity of 30 tonnes or less, must be eliminated.

On aluminum smelters, 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.

COAL-TO-CHEMICALS, COKE

It noted that traditional coal-to-chemical capacity, a highly polluting and water-consuming sector, exceeded demand by 30 percent. In the first half of 2009, only about 40 percent of coal-to-methanol facilities were in operation.

The government said it planned to toughen regulatory standards to restrict entry in these sectors.

It also bans for three years new plants that produce only coke -- processed from coal and used as a fuel in smelting iron ore.

In unusually blunt wording, the cabinet also pointed its finger at local authorities.

"Some regions have acted illegally. We are once again seeing cases of illegitimate approvals, of construction starting before it has been approved, and of construction starting even as the approval process is underway," it said.

The cabinet's strident warning about overcapacity underscored why Chinese officials have been circumspect about the economy, repeatedly saying that it has shown signs of recovering from the global financial crisis but is still not on solid ground.

On Tuesday, the central bank said it would stick to its accommodative monetary policy to support an economy that is suffering from weak external demand.

Also on the blacklist is cement of which China is the world's top producer and consumer: projects that had not kicked off construction as of September 30 would be halted and reviewed, the notice said. Certain provinces will also be asked to make plans to eliminate outdated capacity within three years.

Any additions of new capacity must be met by corresponding and equivalent cuts in outdated capacity, it said.

"China's cement production capacity will rise to 2.7 billion tonnes per year if all approved projects start operation, and market demand totals only 1.6 billion tonnes," it said.

For the wind power industry, it said that in 2010 Chinese companies would produce equipment equivalent to 20 million kilowatts of capacity, but that the country would install only 10 million kilowatts of actual capacity.

To tackle this oversupply, the cabinet said it would in principle refuse approval for the construction of complete wind-power equipment factories. It also banned investors in the sector from using locally produced equipment, aiming to prevent local governments from building their own equipment plants.

(additional reporting by Chen Aizhu, Alfred Cang and Fayen Wong; Editing by Tomasz Janowski)

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