* China to encourage consolidation in major sectors like
steel, autos and aluminium
* Tackling steel overcapacity still the big challenge
* Market forces expected to have the last word - analyst
(Adds background, details)
BEIJING, Jan 22 China, the world's largest steel
producer, aims to bring around 60 percent of total steel
capacity under the control of its top 10 steel mills by 2015 as
part of a wide-ranging plan to restructure its industries.
The Ministry of Industry and Information Technology (MIIT)
announced on Tuesday it would encourage big state firms to
acquire smaller rivals in a variety of industrial sectors,
including automobile and machinery manufacturing as well as
agriculture, metals and cement.
It said it would also seek to bring 90 percent of automobile
production under the control of its top 10 firms by the end of
2015 as well as 90 percent of aluminium production capacity.
The government also plans to cut the number of firms
involved in the exploration, smelting and separation of rare
earths over the next three years.
Around half of China's total steel capacity is now owned by
the 10 biggest steel firms following previous restructuring
programmes, but Beijing has struggled to overcome obstructionism
and red tape from local bureaucracies, or change the economic
incentives that have allowed small and private mills to thrive.
"It is still quite difficult to consolidate and the key
issue remains the local governments -- they remain big
supporters of steel mills," said Henry Liu, head of commodity
research at Mirae Asset Securities in Hong Kong.
Overcapacity has been identified as one of the biggest
problems facing the sector and the reason why profit margins
remain perilously thin.
Chi Jingdong, vice-secretary general of the China Iron and
Steel Association, told a conference in December that total
steel capacity now stands at 980 million tonnes -- a surplus of
nearly 300 million tonnes.
China said last month that it would also winnow down the
number of small and private mills by raising environmental
requirements, forcing steel producers to improve efficiency and
install new equipment.
According to new guidelines included in a "five-year plan"
to combat pollution, steel mills will not be permitted to build
new capacity in 47 large cities, including Beijing, Shanghai,
Tianjin and Chongqing.
While the new rules are likely to increase environmental
costs, the majority of small and profitable private mills are
likely to have the resources to upgrade and -- if necessary --
relocate, but most have already done so, said Liu.
Analysts say market forces are likely to be the determining
factor in the end, and while the faltering economy has hurt the
industry, officials have said it could also be a blessing if it
puts the minnows under more pressure to restructure.
But Liu said conditions were still not bad enough to force
some of the smaller players out of business.
"Even though we talk about the economic slowdown, the steel
mills are fine -- they are still making a decent return."
(Reporting by David Stanway and Ruby Lian; editing by Miral