Reuters reported that China's cabinet has laid out detailed plans to curb overcapacity in industries such as steel, aluminium, cement and wind power, warning that the country's economic recovery could otherwise be hampered.
In a reiteration of existing policy targets, the State Council said meeting the government's long-standing goal of reducing overcapacity was urgent because the result of inaction would be factory closures, job losses and rising bad bank loans.
It said "What especially require our attention is that it is not only traditional industries such as steel and cement that suffer from productive overcapacity and are still blindly expanding. While highlighting overcapacity in sectors such as steel and cement both energy guzzling and polluting, it also aimed at new industries such as wind power equipment and silicon.
It said there is 58 million tonnes of crude steel capacity under construction, most of which is illegitimate. Crude steel capacity could exceed 700 million tonnes and overcapacity will intensify if curbs are not implemented in time. The cabinet said it would no longer approve or support any new steel projects or any expansion in existing projects.”
Analysts said the immediate casualty of the clamp-down could be Australia's coking coal sector, whereby exports to China have surged more than 10 fold from a year ago to reach 14 million tonnes in the first eight months of this year.
Mr Clyde Henderson a coal analyst at Wood Mackenzie consultancy in Sydney said "The policy would support our view that the surge in China's coal imports over the past few months will be short-lived. From an Australian perspective, we could be seeing some degree of a pullback over the coming months."
He said that "But still, many other steelmakers elsewhere are now looking to restart their capacity, so that will compensate for softer demand in China."
China has recently emerged as a net importer of coking coal, in part driven by the closure of small and unsafe mines at home. The surge in Chinese demand has also helped hard coking coal prices to rebound by some 30% since December to around USD 150 per tonne to USD 160 a tonne in the spot market.
By 2011, blast furnaces with a capacity of 400 cubic meters or less, and rolling furnaces and electric furnaces with a capacity of 30 tonnes or less, must be eliminated. On aluminium smelters, the Cabinet repeated pledges announced in May to ban for three years new capacity and to remove small plants with combined capacity of 800,000 tonnes by 2010.
It noted that traditional coal to-chemical capacity, a highly polluting and water-consuming sector exceeded demand by 30%. In the H1 of 2009, only about 40% of coal to methanol facilities was in operation.
The government said it planned to toughen regulatory standards to restrict entry in these sectors. It also bans for three years new plants that produce only coke processed from coal and used as a fuel in smelting iron ore.
In unusually blunt wording, the cabinet also pointed its finger at local authorities. It said "Some regions have acted illegally. We are once again seeing cases of illegitimate approvals, of construction starting before it has been approved, and of construction starting even as the approval process is underway."
The cabinet's strident warning about overcapacity underscored why Chinese officials have been circumspect about the economy, repeatedly saying that it has shown signs of recovering from the global financial crisis but is still not on solid ground.
