Reflections on restructuring of the Chinese steel industry March 2016
Executive summary The planned 100-150mt of steel capacity reduction in China over the next 5 years is a step in the right direction to reducing overcapacity in an industry incurring unsustainably high losses. However, the risk is that the targeted reduction will not be sufficient to ensure sufficiently high utilisation rates required for industry sustainability. In addition, unless the central government ensures that the right systems are in place with the authority to enforce removal of a sufficient quantity of unprofitable capacity, the risk is that the pace of capacity reduction will be too slow • The Chinese steel industry is facing challenges very similar to those faced by the European steel industry in the 1970’s and 1980’s – Steel demand plateauing or declining after many years of strong industrialisation-driven growth – Unsustainably high losses – Overcapacity and high fragmentation of supply: too many producers chasing too little demand – Provincial governments in China (national governments in Europe) interested in maintaining capacity, investment, production and labour even in the face of losses • The Davignon II plan implemented in Europe in the early 1980’s reduced capacity by 20 %, improved utilisation rate by 10 percentage points and returned the industry to profit. In contrast to previous, ineffective policies, success of Davignon II was due to well designed and defined policies with clear targets and control systems, and the authority to enforce them • The European experience highlights the need for clear instruments and authority to realise required capacity cuts in China. In addition, the targeted reduction of 10-15% over 5 years risks being insufficient, especially if demand continues to decline 1 1
At the beginning of the 1970s, the European steel industry faced challenges that are very similar to those facing the Chinese steel industry today Europe – beginning of 1970s China – today • Steel demand peaked around 1973 • Steel demand has effectively peaked • Weak demand partly offset by higher • Weak demand partly offset by higher exports (ca. 25% of ASC) exports (ca. 18% of ASC) • Overcapacity, with utilisation rate • Overcapacity, with utilisation rate down to declining to around 65% 75% • Accumulated losses of ECU 3 billion • Accumulated losses of RMB 9.2 billion ≈ ($3.4 billion) in 1977 (ca. $25/t) ($14.8 billion), Jan-Nov 2015 (ca. $25/t) • Highly fragmented industry • Highly fragmented industry • National interest in maintaining • Provincial interest in maintaining capacity, investment, production and capacity, investment, production and labour labour • Limited power of European community • Relatively strong authority of Central Government 2 2
European steel demand peaked around 1973; Chinese steel demand has effectively peaked since 2013 Europe* - crude steel consumption China - crude steel consumption kg/capita kg/capita (LHS), yoy growth % (RHS) (LHS), yoy growth % (RHS) 700 50% 700 50% Demand growth Saturation of Peak Demand growth (driven by industrialisation) demand (driven by industrialisation) 600 40% 600 40% 500 30% 500 30% 400 20% 400 20% 300 10% 300 10% 200 0% 200 0% 100 -10% 100 -10% 0 -20% 0 -20% 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 annual growth rate (RHS) kg/capita (LHS) annual growth rate (RHS) kg/capita (LHS) * Western Europe (EU15) 3 3
The losses in China are similar in scale to those incurred in Europe in the 1970s Example of 2 European steel producers CISA members ’ net profit composition loss per tonne of steel ($/t) (USD/tonne) 9 7 19 18 18 10 17 10 3 10 (3) 9 8 (5) 5 5 (8) 3 (7) (2) -8 -8 (11) -11 -11 (13) -14 -16 -10 -10 (18) -10 -33 -33 (24) (31) -35 (31) -49 -55 (34) (35) -30 -30 (2) -33 (45) -35 -50 -45 -50 -70 -70 -75 -90 -90 -110 -110 -109 1975 1976 1977 1978 1979 1980 British Steel Company loss per tonne of steel ($/t) CISA net profit of non-steel business $/t Arbed loss per tonne of steel ($/t) CISA net profit of steel business $/t CISA net profit $/t 4 4
Davignon II plan implemented in Europe reduced capacity by 20 %, improved utilisation rate by 10 percentage points and returned the industry to profit What policies? What was achieved? • No new capacity • No capacity reduction • State aid proposing capacity cuts • Reduction of manpower by ca. supporting redundancies 120k (ca. 15%) over 3 years 1977-1980 • Limited authority of European • Improvement of productivity Davignon I commission over national subsidies and • No improvement of utilisation rate plan aids • Clear targets of capacity cuts at plant level • Capacity reduction of ca. 40mt (20%) within 5 years • Well designed instruments to implement • Reduction of manpower by ca. plan 200k (ca. 30%) over 6 years • In total ECU38 billion state aid • Improvement of industry - Ca. ECU23 billion for debt restructuring 1980-1985 utilisation rate by almost 10% , - Ca. ECU 2 billion for capacity cuts Davignon II despite declining demand (redeployment/redundancies) plan • Return of the industry to • Legal framework for state aid to define and profitability control the allocating of funding • Authority of European commission over national governments 5 5
Chinese government policy is directionally correct, but to be successful it needs clear systems/instruments and authority and should arguably target deeper reductions Europe – Davignon plan II China – government policies Key policies Mandatory production quotas applied X No government plan to impose 1 to 4 cat. steel products (80% total steel production quotas Production Voluntary production cuts as response to Short term stabilisation outputs) for 3 years until June 1983 Strict control system and fines imposed quota low profit margins resulted in temporary by Europe Court of Justice market stabilisation in the past Compulsory minimum prices according X No government plan to impose 2 to the sensitivity of the products to define minimum prices Minimum what prices increase were necessary Regulated by law with fines imposed by prices Europe Court of Justice Reduction of ca. 200k people (ca. 33%), Targeted reduction of ca. 500k people (ca. 14%) Sustainable market improvement 3 In total ca. RMB53 billion required (ca. including Davignon I of ca. 320k (ca. 45%) Of ca. ECU38 billion total state aid ca. RMB105000 per person) for 150mt cut , Labour ECU2 billion (ca. 5%) for with 2/3 from Central Government (ca. RMB35 reduction billion which reflects ca. 1/3 of total fund of redundancies/ redeployment (ca. ECU 10000 per person) RMB100bn) / X Targeted capacity reduction of 100-150mt 4 Capacity reduction of ca. 40mt (20% ) (9-14%) within 5 years – is this sufficient? within 5 years / X Required estimated debt restructuring of RMB Financial aid of ca. ECU23 billion (12 Capacity cuts 270 billion (5 times of aid of redeployment) times of aid of redeployment) Central government has given clear high level Legal power over national aids and target subsidies decision X Instruments and control system have to be put Precise business plan required proving in place 6 6 long term financial viability
There is a real risk that capacity reduction will be insufficient and/or too slow; this is what happened in Europe in the 1970s W. Europe* - production, capacity and China - production, capacity and utilisation utilisation rate (million tonnes, %) rate (million tonnes, %) 300 100% 1500 100% Capacity expansion Overcapacity Capacity expansion Overcapacity - to meet the high demand - when demand - to meet the high demand - when demand growth saturated growth slowed down 250 90% 1250 90% 200 80% 1000 80% 150 70% 750 70% 100 60% 500 60% 50 50% 250 50% 0 40% 0 40% 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Capacity Production Utilisation Capacity Production Utilisation *EU 9 countries include Germany, UK, France, Italy, Ireland, Belgium, Denmark, Luxembourg, Netherlands 7 7
Recommend
More recommend
