May 11, 2017 07:59 PM

China Hits Speed Bumps in Drive to Cut Overcapacity in Steel, Coal Sectors

(Beijing)–China’s mission to reduce excess capacity in its steel and coal sectors is progressing, yet is still running into speed bumps: market volatility and concerns about layoffs, debt issues and corporate restructuring.

Nationwide, the country has shed 31.7 million tons of steel capacity and nearly 69 million tons of coal-mining capacity so far this year. That means that of the government’s reduction goals for 2017, 63.4% has been achieved for steel and 46% for coal, according to a statement released after a regular Wednesday meeting of the State Council, China’s cabinet.

However, inspectors sent by the central government also spotted problems that are holding the drive back. For example, increases in demand and prices for steel and coal have reduced the willingness of some companies to cut back, the statement indicated.

The government has vowed to “firmly punish” defiant companies and hold accountable local authorities who are not cracking the whip on them.

“Progress in the washing out of outdated capacity in some places has been slow, while the rearrangements for laid-off workers, the disposition of debt, and the mergers and restructuring (of companies) have been difficult,” the statement said.

China launched the campaign to trim excess industrial capacity last year after the steel and coal sectors were hit by massive losses in 2015, when prices plummeted to multi-year lows.

The drive to cut capacity strained the domestic supply of steel and coal in China, shot up their prices, and sent both industries back to profit.

Prices of coal are still elevated after marginal falls in recent months, with the Bohai-Rim Steam-Coal Price Index (BSPI), which tracks domestic thermal coal spot prices at major ports in northeast China, up 53% over the past year to 596 yuan ($86.3) per ton.

Year-on-year increases in steel prices slowed this year as the government clamped down on the real-estate market, which heavily uses steel, yet they have remained solid. The average spot price of 25mm domestic rebar steel is more than 40% stronger than a year ago, according to Beijing-based metals information provider Antaike.

The increase in prices lured steelmakers and coal mines to rev up production, with some dodging the government order to shut down inefficient or substandard capacity.

Authorities have intensified efforts to crack down on such practices. For example, the government in Liyang, in the eastern province of Jiangsu, has ordered the power supply to 30 steelmakers in the city to be cut off by the end of June because they were deemed substandard, the state-run Shanghai Securities News reported Thursday. 

The State Council statement pledged the government will “firmly punish enterprises that produce and construct (facilities) in violation of the law and regulations, or operate in ways that do not meet environmental protection, quality and safety standards.” It added that local governments who fail to enforce the campaign rules “will be held accountable seriously.”

More than 65 million tons in steel capacity and 290 million tons in coal-mining capacity were trimmed in 2016. Premier Li Keqiang announced in March that the country aims to reduce steel capacity by around 50 million tons and close down at least 150 million tons of coal production capacity this year. 

China is also tackling an electricity-supply glut: It plans to suspend or postpone construction on or eliminate no less than 50 million kilowatts of coal-fired power generation facilities, and “make room for clean energy,” Li said. Local authorities are required to make sure that cut steel capacity isn’t revived and that coal mines targeted on the government’s elimination list are closed down by the end of November, the State Council statement said.  

Last year, the bid to cut overcapacity in the steel and coal sectors led to 720,000 workers being transferred to other jobs, Premier Li said in March. 

The number of laid-off workers in the sectors could rise to “nearly one million” this year. That is because some workers laid off last year have remained jobless and the government has expanded the capacity-reduction drive to include thermal-power plants, Li said.Contact reporter Fran Wang (

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