Earlier today China’s state council provided further information on how it plans to reform inefficient and heavily indebted state-owned enterprises (SOEs).
According to Reuters, beyond reiterating commitments to make SOEs more efficient and responsive to market forces, the council announced that it plans to transfer state assets into private hands, adding that dividends and income from firms would be used to fill in gaps at Chinese pension funds and other social security funds.
It also announced that it will concentrate its ownership in key sectors, and facilitate the exit from industries it deems to be non-core to the economy.
The council said that it would accelerate the elimination of obsolete and excess production capacity in industries plagued by overcapacity.
It didn’t name specific industries, but it’s likely that steel manufacturers would be near the top of the council’s list.
Last week Xu Lejiang, chairman of China’s second largest steel producer Shanghai Baosteel Group, stated that nation’s steel industry, responsible for producing more than half global output according to data from the World Steel Association, is bleeding cash with “every producer feeling pain.”
Xu noted losses for the industry totaled 18 billion yuan ($2.8 billion) over the first eight months of the year compared with a profit of 14 billion yuan in the same period a year earlier, pointing to the likelihood that Chinese steel production may decline by as much as 20% due to chronic sector oversupply.
“If we extrapolate the previous experience in Europe, the United States, Japan, their steel sectors have all gone through painful restructuring in the past, with steel output all contracting by about 20%,” Xu stated in an interview with Bloomberg.
Given the moves made by China’s state council today, it appears that expected reduction may now substantially faster than first thought.
While a welcome step in terms of reforming and eliminating inefficient sectors of the economy, it’s also likely to heap further pressure on miners supplying China with iron ore and coking coal, the key ingredients in the steelmaking process. They’re ramping up supply, just as it appears China’s demand is about to fall.
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