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Burden of excess

(China Daily)
Updated: 2009-05-14 07:39

Slower-than-expected industrial production in April should sound the alarm for steelmakers who have pinned too much hope on a V-shaped recovery of the Chinese economy.

As a tentative sign of bottoming out, accelerated industrial production in March has once again helped ease worries about China's 6.1 percent economic growth in the first quarter - the slowest in about a decade.

Riding on a belief that the country's 4-trillion-yuan stimulus package will effectively boost domestic demand, Chinese steelmakers have been ostensibly struggling to make a profit by keeping all their mills running to full capacity.

Yet with the country's industrial growth slowing down from 8.3 percent in March to 7.3 percent last month, the problem of overcapacity looms increasingly large. The Ministry of Industry and Information Technology has recently, for the first time, issued an urgent order to check excessive output growth in the steel and iron industry.

It is high time Chinese steelmakers took the warning seriously. Otherwise, many of them run the risk of even bigger losses from overcapacity than what they have already suffered since later last year.

On the one hand, deeper-than-expected slump of exports in April shows that global conditions provide little cause for optimism of a turnaround in demand for Chinese products. China's exports dropped 22.6 percent in April from a year earlier, much bigger than the drop of 17 percent in March. It is obvious that domestic steelmakers still cannot count on overseas demand to absorb their output after exports plummeted by 71 percent year-on-year in April.

On the other hand, the short-lived industrial acceleration means that a solid recovery is not a sure bet, despite government efforts to boost public confidence, and persuade consumers and companies to spend.

It is estimated that 470 million tons of steel will be enough to meet the domestic and export demand this year.

But the current production capacity already exceeds that by a quarter. Unfortunately, surging imports of iron ore and increasing daily steel output indicate that domestic steelmakers continue to ignore the risk of overcapacity.

In addition, to maintain economic growth and boost industrial restructuring and upgrading, the Chinese government has decided to eliminate 72 million tons of obsolete iron capacity and 25 million tons of obsolete steel capacity by 2011.

Chinese steelmakers must deal with the problem of overcapacity now.

(China Daily 05/14/2009 page8)