China’s steel industry is in need of radical reform. It has become bloated. Similar occurrences developed in North America, Europe and Japan in the latter part of the last century. In all cases, to solve the problem it was necessary to embark on permanent factory closures to bring supply and demand nearer into balance. Such a solution was extremely painful for the workforces.
Governments needed to be involved to oil the wheels and provide the necessary funds for generous payouts to staff that lose their jobs. New investment, in the regions affected, was also necessary to stimulate modern industries and create employment. Encouraging mergers and acquisitions as the vehicle for efficient rationalisation also assisted in creating an efficient sector. The plan will work only if all three policies are initiated together.
Creating jobs in new and growing sectors of the Chinese economy would be much more sensible than preserving them in the large number of inefficient steel mills. The government would be required to provide the funds for payments to the workers affected and to provide capital for new ventures.
Can the authorities afford to sit back and wait for a solution to appear? Further investment in infrastructure projects is being planned and will help. However, continued rapid spending on capital projects is not the long term solution.
China’s economic growth is expected to fall to figures between 7 and 7.5 percent, this year and next, according to the latest estimates from both the IMF and OECD. These numbers may appear substantial by standards of developed nations. However, for China, they are very poor compared with results since the beginning of the 1990’s.
The steel sector is under negative pressure now that the real estate market is in decline. Steel prices are weak and mill profitability almost non-existent. The steelmakers are required to invest in air and water anti-pollution measures.
Overcapacity exists and the mills are oversupplying the domestic market. The steelmakers are increasing export sales in an effort to minimise the problem. The current situation in the Chinese steel sector is a mirror image of those that existed in the other major economies in the 1980’s and 1990’s but the numbers are much bigger. However, the dilemma is not confined to the mills alone. Action needs to be taken to modernise the archaic and inefficient steel distribution mechanism.
Source: MEPS China Steel Review