March 7, 2017 4:00 am JST

China plans broader industrial capacity cuts

Government aims to trim fat in construction materials, coal-fired power

SHUNSUKE TABETA, Nikkei staff writer

China's National Development and Reform Commission chairman, He Lifeng, speaking Monday, is taking on excess industrial capacity.

BEIJING -- The body that steers China's economy said Monday it will push for industries beyond coal and steel to slash excess capacity, a policy shift that could reverberate throughout global markets.

"We'll accelerate supply-side structural reform," He Lifeng, chairman of the National Development and Reform Commission, told reporters. Deputy chief Ning Jizhe called paring capacity the most important of these measures.

China's annual target for real economic growth has been lowered for a third straight year, this time to around 6.5%, reflecting a focus on longer-term stability rather than pursuing excessively high growth. Capacity cuts -- listed as a government priority in the report delivered at the National People's Congress that kicked off Sunday -- are part of this effort to keep the economy on an even keel.

Powering down

The new targets include coal-fired power generation, where the government aims to eliminate 50,000 megawatts of capacity this year. This is equivalent to about 5% of the country's total capacity of 1.05 million megawatts at the end of last year, National Energy Administration data shows.

With capacity growing at a steady clip, "operating rates hit a record low in 2016," a top executive at a power company said. The NDRC has been stingy with approvals for new construction while encouraging operators to scrap existing facilities, mainly inefficient, pollution-spewing older units. Because power generation and transmission are handled separately in China, lower supply could push wholesale electricity prices higher.

Ning also indicated plans to scale back capacity for such materials as cement, glass and copper, citing supply gluts in construction materials and nonferrous metals.

"We'll reduce production capacity via such measures as market control and legislation," Ning said.

China can churn out up to 3.5 billion tons of cement a year, data from a construction industry group shows, about 30% of which is believed to be surplus capacity. The government probably will aim for a 10% reduction to begin with. Meanwhile, glass production facilities are reportedly running at around 70% of capacity, a figure that an industry group aims to boost to about 90%. An industry shakeout will be encouraged to accelerate the process of scrapping excess equipment.

Tougher choices ahead

Efforts to eliminate coal and steel capacity will continue. This year's targets have been set at 150 million tons for coal and 50 million tons for steel, less than the 290 million tons and 65 million tons, respectively, taken out of commission last year. But Ning stressed that this does not mean the NDRC is easing up on these industries.

Coal and steel companies beat last year's targets by scrapping old, essentially unused, equipment, according to an industry insider. "The 2017 cuts cover only equipment currently in operation, so companies will put up more of a fight," said a top official at a coal miner in Shaanxi Province.

Improving corporate earnings by lifting prices is likely to be another goal of the cuts. Steel and coal prices peaked last year nearly double their levels at the end of 2015, while steelmakers' and major coal companies' aggregate profits in 2016 were triple the levels the previous year. The government probably hopes for a similar effect this time around.

As the world's largest consumer of coal as well as the top steel producer, China plays a major role in shaping the global markets for both commodities. When materials prices rose higher than expected last year, Beijing sought to bring them under control by encouraging companies to sign long-term supply contracts at low prices.

The fact that direct government guidance has such an impact on production is bad for price stability, a foreign expert on China's energy market said, adding that policies focused on market mechanisms would be a better choice.

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