May 8, 2014 / 7:26 AM / 4 years ago

UPDATE 1-China to close more steel capacity, though still small fraction

(Adds analyst, context)

By David Stanway

BEIJING, May 8 (Reuters) - China has raised its target to close outdated steel smelting capacity to 28.7 million tonnes in 2014, the industry ministry said on Thursday, as it tries to rein in inefficient and polluting industries.

The figure is above the 27 million tonne closure target included in a government report delivered by Premier Li Keqiang in March, although is still only a fraction of overall capacity after crude steel output hit 779 million tonnes last year.

Beijing has been trying to force industries such as steel, cement and aluminium to update technology and close obsolete facilities in a bid not only to improve air quality, but also to tackle supply gluts that have eroded profits and put dozens of plants on the brink of bankruptcy.

China’s efforts to shut down steel plants are unlikely to have a material impact on crude steel production, Alvin D‘Almaida, an analyst at Wood Mackenzie told an industry conference in Singapore.

“Much of the shut down capacity will target small, obsolete plants and many of which are already idle. Shutting large plants is unlikely given the impact on employment and the high level of unpaid debt it would create,” he said.

Separately, the chief executive of miner Rio Tinto said that moves by China to reduce capacity by closing ageing steel mills would mean that the country would need more high-grade iron ore produced by countries such as Australia.

“There have been announcements they will take off capacity from those mills that are the least environmentally performing. Associated with that, we’ve also seen there’s been a move to high grade the iron ore that the mills are bringing in,” Sam Walsh told reporters after Rio Tinto’s Australian annual meeting in Melbourne.

China’s Ministry of Industry and Information Technology (MIIT) said in an announcement on its website (www.miit.gov.cn) that it would also shut 50.5 million tonnes of cement capacity this year, higher than the 45 million tonne target set in March.

China also pledged to close 420,000 tonnes of outdated aluminium capacity and 512,000 tonnes of copper production capacity this year.

In addition, 12 million tonnes of coking coal production facilities, 2.65 million tonnes of papermaking capacity and 102,400 tonnes of rare earth oxide production is due to be shut.

The closures are part of a national “eliminate outdated capacity” programme and are separate from a government plan to combat air pollution by shutting facilities such as steel mills and cement plants in northern China and other smog-hit regions.

The province of Hebei has been ordered to close 60 million tonnes of crude steel production between 2014-2017, and China is also forcing hundreds of industrial enterprises to upgrade technology to reduce air and water emissions.

An action plan on air pollution issued last year also banned the construction of new steel, oil refining or thermal power facilities in heavily polluted regions such as Beijing and the Yangtze and Pearl river deltas.

China has excess industrial capacity in many sectors. The utilisation rate in the steel sector was just 72 percent in 2013, while in the cement and aluminium sectors the rate stood at 73.7 percent and 71.9 percent, respectively, according to official estimates.

Authorities have threatened tough punishments for industrial plants that continue to operate despite failing to meet capacity, environment and technology standards, but it is also planning to boost incentives for firms to toe the line.

China’s finance ministry said on Tuesday it would provide more subsidies for smaller firms to help cover the cost of meeting the new standards. (Additional reporting by Manolo Serapio in SINGAPORE and Sonali Paul in Melbourne; Editing by Ed Davies)

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