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UPDATE 1-China drops steel industry consolidation target in new plan
March 25, 2014 / 4:20 AM / 4 years ago

UPDATE 1-China drops steel industry consolidation target in new plan

* 2015 steel consolidation target dropped amid opposition from industry

* China focus shifts to market forces from direct govt interference

* To cut red tape, ease approvals, financing for mergers (Recasts, adds quotes from industry minister)

By David Stanway

BEIJING, March 25 (Reuters) - China has dropped a long-standing target to bring 60 percent of its steel sector under the control of its 10 biggest enterprises by 2015, a goal that has been criticised by companies such as Baosteel for causing a build-up of unprofitable capacity.

The world’s biggest steelmaking nation has in the past been accused of strong-arming state firms into pursuing unprofitable mergers, including the protracted takeover of Benxi Iron and Steel by its bigger local rival, Anshan Iron and Steel .

Facing flak for its failure to heed market signals, China has been trying to change the way it regulates its economy, and aims to stop interfering directly in the approval and construction of industrial projects and focus instead on macroeconomic regulation.

A new industry consolidation plan published on the website of the Ministry of Industry and Information Technology (www.miit.gov.cn) late on Monday said China would continue to simplify approval procedures and also make it easier for firms in bloated sectors like steel, cement and aluminium to finance acquisitions.

But the plan did not include the target, last mentioned in official policy documents in January 2013, to put 60 percent of China’s total steel production capacity in the hands of its top 10 steel mills by the end of 2015, up from the 40 percent they control now.

Officials acknowledge that attempts to force industries into complying with state targets have been counterproductive, with vice-industry minister Su Bo admitting in a Monday speech that “the government has interfered too much”.

The 60 percent target was part of a state strategy designed to help state-owned steel firms become more competitive by encouraging them to swallow smaller rivals, and led to a series of high-profile mergers in the sector.

But the approach has been heavily criticised within the industry, with big firms increasingly reluctant to take on more unprofitable capacity.

Xu Lejiang, the chairman of Baoshan Iron and Steel Group (Baosteel), China’s second-biggest producer by total capacity, said last year that the policy had created “huge monsters” lumbered with debt and unprofitable investments.

RELENTLESS CAPACITY INCREASE

Before the global financial crisis hit in 2008, China’s big state-owned steel firms were desperate to expand their market share through relentless capacity increases, with many firms targeting annual production volumes of more than 50 million tonnes.

But the focus on size rather than efficiency encouraged smaller private players, backed by local governments keen to protect valuable sources of jobs and revenues, to expand as quickly as they could to avoid being taken over by bigger rivals, worsening the supply glut and further eroding sector profit margins.

“Some local governments, pursuing rapid economic growth and government revenues, distorted market signals and affected the normal investment decisions of enterprises by providing land at low or even zero cost, cutting taxes and awarding subsidies, resources and credit,” vice-industry minister Su said.

Deng Qilin, chairman of China’s fourth-biggest producer Wuhan Iron and Steel Group, told Reuters earlier this month that firms like his had ended their obsession with “disorderly” expansion and were focusing on improving competitiveness.

“Expanding further is meaningless - if you are making losses, having more capacity will lead to even more losses,” he said.

He Wenbo, chairman of Baosteel’s listed unit, told reporters earlier this month that China’s 10 biggest steel producers last year accounted for 39.4 percent of total crude steel output. He also said he expected the share of privately-owned steel mills, now at around half, to continue to expand over the next decade.

China has long sought to tackle problems of overcapacity in industries like steel, and has recently focused on improving technological standards and eliminating low-quality capacity. Its last consolidation plan said it would focus more on “establishing and perfecting” market mechanisms.

According to official data, utilisation rates in China’s steel sector stood at just 72 percent last year, while that for the cement, aluminium and shipbuilding sectors reached only 73.7 percent, 71.9 percent and 75 percent, respectively. (Additional reporting by Matthew Miller and Yan Huang; Editing by Joseph Radford and Muralikumar Anantharaman)

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