Overcapacity in China

The Chinese government has been trying to reduce overinvestment and overcapacity in a wide range of industries such as steel, shipbuilding, wind turbines, solar panel etc. since a very long time. However, most of its grand schemes have come to a naught, as the local governments keep up propping local companies despite massive losses being made by those organizations. Some of the Chinese solar companies such as Chaori, LKD and Suntech have gone under, but they have been bought over by local government investment agencies which means that the overcapacity still remains.

The aims of the local officials is to increase growth at any cost and they have lavished may industries with cheap debt, free land and utilities as these companies not only help them meet growth targets which help in promotion, but also generate large amounts of local employment. However, this had led to a global problem in many industries. Almost every country has imposed anti-dumping duty on Chinese made steel, which is swamping every market as the country is unable to absorb the massive 1 billion ton a year capacity that has been created. China is trying to now cut the steel capacity by about 100-150 million tons, which might not be enough even if they could cut it. Solar panels too have seen massive overcapacity, but the huge increase in demand due to low prices has meant that some semblance of supply demand balance has been achieved. However, new Chinese companies keep popping up and putting up GW capacities without any experience and expertise. Shipbuilding has become comatose, while coal mining too faces a bleak future. China has developed almost 3.5 billion tons of coal a year capacity, which now has to be cut sharply as thermal plant power declines. Steel and cement are also undergoing a slowdown.

China has become too huge for it to viably export its cheap capacity. Steel and coal makers are going bankrupt worldwide due to the Chinese problem. Wind turbines is the only industry where the government has managed to curtail capacity, while other industries see price and margin issues. I don’t think the government can go against vested interests who want these factories to keep going. Fear of a massive worker unrest has prevented the government from closing factories by cutting funding support to these zombie organizations.

However, I think that a time will come when the accounts will have to be balanced by the Chinese government and they will be forced to close down the uneconomic capacity that has been created. It is only so long that you can extend and pretend.

China to close 1000 coal mines

China will aim to close more than 1,000 coal mines over the course of this year, with a total production capacity of 60 million tonnes, as part of its plans to tackle a price-sapping supply glut in the sector, the country’s energy regulator said.

In a notice posted on its website (http://www.nea.gov.cn), the National Energy Administration said the closures would form part of the plan released earlier this month to shut as much as 500 million tonnes of surplus production capacity within the next three to five years.