China steel cut plans not enough to solve sector woes: exec

BEIJING (Reuters) - China’s plan to close 100 million-150 million tonnes of poorly performing steel capacity in the next five years is unlikely to be enough to drag the stricken sector out of the doldrums, a parliamentary delegate and steel mill head told Reuters.

An employee works at a factory of Dongbei Special Steel Group Co., Ltd., in Dalian, Liaoning province, China, December 5, 2015. REUTERS/China Daily

As it steps up its efforts to deal with price-sapping capacity gluts in industrial sectors, Beijing has promised to force through the closure of hundreds of “zombie” steel mills and will also make funds available to deal with laid-off workers.

But Zhang Wuzong, head of Shandong province’s Shiheng Special Steel Group, said the targets laid out in an action plan in February would not be sufficient to tackle a surfeit of capacity estimated at around 400 million tonnes, especially as domestic steel demand continues to decline.

“China’s steel production is actually 800 million tonnes, and it should be at the 1.1 billion or 1.2 billion level, so getting rid of 100 million or 150 million isn’t any good - 300 million or 400 million is more appropriate,” he said.

He said he expected domestic steel production to fall around 5 percent a year in the next five years to end the decade at around 600 million tonnes. Production last year was 803.8 million tonnes after dropping for the first time since 1981, with the sector now acknowledging that output has peaked.

While urbanization will continue, China’s cities already have massive housing surpluses, and infrastructure construction - including roads and railways - is already more or less complete, he said, further limiting steel demand.

Prices of steel and iron ore have recently shown signs of recovering, driven by post-holiday restocking and the risk of capacity closures in the top steel producing city of Tangshan, but Zhang said that could not be sustained because it was not based on real improvements in underlying demand.

“My view is that this is temporary and is a bubble,” he said. “We shouldn’t view this incorrectly. The recent recovery has political reasons and has been brought about by people’s emotional needs.”

China has made 100 billion yuan ($15 billion) available to handle layoffs in the steel and coal sectors, with local governments entitled to apply for the funds once “zombie enterprises” have been shut down. But the money would not be used to resolve the thornier problem of bad debts.

“This will not just be used to solve steel, but also coal and others, so the allocation to steel will be around a third and it won’t solve the problems, and it won’t solve the problems of asset losses,” said Zhang.

According to the China Iron and Steel Association, the debt ratio of major steel mills rose 1.6 percentage points to 70.1 percent last year, with total debts rising to 3.27 trillion yuan.

“This debt will be solved gradually, and banks will bear certain losses - this is a certainty.”

Reporting by David Stanway; Additional reporting by Coco Li; Editing by Joseph Radford