Chinese overcapacity shocks the world

Overcapacity has been a "disease" for China's industrial development in recent years. The most direct indicator of capacity utilization is capacity utilization, defined as the difference between actual production and optimal production capacity in a long-term equilibrium.

The United States, Japan and other countries have long started industrial statistics and tracking analysis of capacity utilization indicators, which is a major monthly indicator for reflecting industrial economic strength and industrial economic trends. Unfortunately, the National Bureau of Statistics of China has not compiled and published this indicator.

Although China does not have indicators of overcapacity, both high-energy electrolytic aluminum, steel manufacturing, photovoltaic solar and wind power in emerging industries, and silicon steel in high-end products in the shipbuilding and steel industries are recognized by the industry as “overcapacity”. ".

It is reported that overcapacity in the steel manufacturing industry has been going on for several years. Before 2007, the utilization rate of crude steel capacity was above 83%. However, after 2007, the capacity utilization rate has reached a whole level and never returned to 80%, that is, long-term. The manifestation of overcapacity.

In April this year, China's average daily crude steel output was about 2.3 million tons, a record high. Even with the end of last year, the growth reached 14%.

Mike Elliott of Ernst & YoungPLL, a large UK consultancy, believes that "China's steel demand growth is around 3% this year." The rate of increase in Chinese companies far exceeds this demand forecast. The steel market is facing historic price declines.

According to the Nikkei Chinese Network, the steel market in the outskirts of Shanghai is “Songjiang Steel City”. Once considered to be the largest steel market in Shanghai with 2,000 steel trading companies, it is now a door-to-door company. “Business has been very bad since last year.” The reporter visited a store that is open for business, and a man who looked after the store answered impatiently.

The harsh winter has arrived - Liu Zhenjiang, vice president of the China Iron and Steel Association, is increasingly feeling the crisis. The China Steel Price Index released by the association has now fallen back to the level of 20 years ago. From January to March, the total amount of pre-tax profit and loss of about 80 key steel companies showed a loss of 2.329 billion yuan.

The market for the steel market triggered by China is sluggish. Competing companies in other countries have also issued complaints.

"Although China's economic growth is slowing down, Chinese companies are still increasing production at this time," said the head of the fuel cell of Posco, a large steel company in South Korea, who did not hide his feelings.

Due to the appreciation of the Korean won, Korean companies have intensified competition with Japanese companies in the field of high value-added products. In the field of general supplies, Posco was also plagued by falling prices due to the increase in production by Chinese companies. “Being caught between Japanese companies and Chinese companies may lose competitiveness.” The Korean steel industry is worried about this “sandwich phenomenon”.

At the same time, in the fiscal year 2013 (as of March 2014), the world's second-largest steel company, the second largest steel company with a loss of 242.7 billion yen, was not restless. In the Japanese market, which is the base camp, Nippon Steel & Sumitomo Metal Co., Ltd. has achieved growth in the field of automotive steel sheets with the help of the yen depreciation. The reconstruction demand (such as the earthquake-stricken areas in Japan) will also support steel demand for construction and civil engineering.

However, if we turn our attention to the international market, it is "China's increase in production has delayed the recovery of the market." In this situation, the company's president, Hideki Toshiki, is also very upset.

The willingness to increase production of Chinese companies is still strong. According to the statistics of China Steel's related website “Zhonglian Steel Network”, 24 new blast furnaces will be put into operation in China in 2014. The annual design capacity is 35 million tons. Although it has been reduced by about half compared with the newly added 70 million tons in 2013, capacity will continue to be enhanced in the case of a downturn.

"Maybe it will repeat the mistakes of the steel industry," and other industries have begun to worry about it. Flat glass is one of the five major overcapacity industries identified by the Chinese government. According to China's securities company Guotai Junan Securities, there are 290 flat glass production lines in China, and 42 new ones are expected this year.

Flat glass is also affected by the oversupply of steel as the price of steel has fallen. Due to the sluggish Chinese real estate market, the current inventory is expanding rapidly. In this context, Chinese companies began to seek to survive through exports.

According to statistics from China, the export volume of flat glass in April was 17.58 million square meters, an increase of 11.4% year-on-year, and the export volume increased to US$13.165 million, 2.4 times that of the same period last year. The main export destination is Southeast Asian countries, and high-performance architectural glass with excellent thermal insulation performance seems to have achieved an increase in exports.

In this regard, Japanese companies have been restless. Japanese flat glass manufacturers executives expressed concern that “it is inevitable to compete in a market with leading edge”. Japan's flat glass companies have production bases in Thailand and other places, and are in a leading position in Southeast Asia. However, Chinese-made flat glass, which is about 10-20% cheaper, has begun to flood into the market.

China’s overcapacity is shaking the world. Why do Chinese companies have to increase production to a level that causes performance to deteriorate?

The reason is the “growth myth” that China is hard to shake. China, which promotes urbanization strategies, continues to invest in infrastructure in local cities. He Wenbo, general manager of Baosteel Group, a state-owned steel company, believes that China's steel consumption will continue to grow from 2018 to 2020. In the context of growing demand, Chinese companies rarely have the idea of ​​reducing production.

In addition, the “GDP supremacy” of local government officials is deeply rooted. Since the reform and opening up more than 35 years ago, China has always given the highest priority to economic growth. Create employment and taxes by selling land use rights to attract businesses. Local officials have been relying on this development model to achieve political achievements.

The chimney of the “Oriental Special Steel”, a private steel company located in the outskirts of Changzhou City, Jiangsu Province, is carrying a thick smoke. The land and equipment of Dongfang Special Steel is owned by “Iron Steel”. Tieben Steel was the industrial land that was used to increase production in 2004, and angered the private steel enterprises of Premier Wen Jiabao.

Wen Jiabao gave instructions for this and demanded that the relevant responsible persons be severely investigated. However, although Imoto was later bankrupt, its production capacity of 1.3 million tons per year was retained and was taken over by Oriental Special Steel in 2009. Although it was once severely criticized by the then prime minister, the equipment was still operating as usual.

The root cause of the problem of excess equipment lies in local protectionism that does not want to lose production capacity, because these productive capacities can create jobs and taxes.

Professor Yu Yihong from the School of Management of Fudan University pointed out that no matter how the central government emphasizes that it should not pay attention to GDP and promote energy conservation and environmental protection, it is not easy to implement it in the first line. Overcapacity is the biggest challenge in the new government's macroeconomic regulation and control in the next five years.

Anthony DeCarvalho, a senior economist at the Organization of Economic Cooperation and Development (OECD), said that China is making a lot of surplus products and hurting the profitability of the global industry. He refers to the global steel industry.

Tian Guoli, Chairman of the Bank of China, believes that from international experience, arranging and digesting excess capacity on a global scale is an important way for the country to achieve economic prosperity and transformation and upgrading.

Zhang Monan, an associate researcher in the Economic Forecasting Department of the National Information Center, once said that China’s “overcapacity” problem is difficult to ease in the short term. Therefore, it is proactive to create external demand, accelerate China’s industrial capital to go out, and actively promote “capacity output”. "Strategy can not only ease the contradiction between internal supply and demand, but also bring greater benefits to China's globalization.

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