Bloated China Steel Sector Facing Closures, Big Miners to Suffer
BEIJING (Reuters) - China's bloated steel sector is facing a wave of closures in the next few years, with slowing demand and decades of "blind" expansion finally about to catch up with the industry, a senior executive and parliamentary delegate said.
Zhang Wuzong, the chairman of the privately-owned Shandong Shiheng Special Steel Group and a forty-year veteran of the industry, told Reuters in an interview that China's problems would also scupper the huge expansion plans of suppliers like Rio Tinto and BHP Billiton, which have bet their future on sustained demand growth in China.
No steel firm will be immune, with the future of even state-owned firms like the loss-making Angang Group at risk, he added.
"The Chinese market is now oversupplied," he said. "The government knows it and we know it. 'Survival of the fittest' is the only way to solve the problems."
"It will take time but I believe a lot of the backward private enterprises will be closed. I also believe there will be some state-owned enterprises that will be eliminated too, including some of the big ones. This is a certainty."
China has at least 900 million tonnes of crude steel production capacity, far higher than its official total output of 716 million tonnes in 2012. Profits in the sector fell 98 percent last year with many firms making losses.
The government said earlier this year that it would implement new policies to encourage mergers and close obsolete smelters, with the aim of bringing 60 percent of total capacity under the control of its top 10 mills by 2015.
"The best way a market can develop is on the principle of 'survival of the fittest' -- it is not a question of state-owned firms taking over private firms or the other way around, but which is the strongest," said Zhang, noting that current policies were mistaken because they distorted "market order".
By forcing better-performing firms to take over the nearly bankrupt, the government was making the situation worse. Angang's listed assets made losses of around 4 billion yuan ($644 million) last year, but the group company has also been forced to acquire other loss-making state-owned steel firms like Panzhihua Steel, despite having no economic rationale to do so, he said.
Zhang said his own company had shed around 2 million tonnes of crude steel capacity in the last few years to improve efficiency. Last year it was only the 64th largest steel mill by capacity, but the sixth most profitable.
Many larger firms, now saddled with capacities higher than the whole of Germany, will have to follow suit, but after assembling huge workforces, they remain under pressure to stick to a losing strategy.
Still, any hope that the government will come and bail them out could finally be dashed, Zhang said.
"Government support is extremely limited -- it's not like before when the government can find the money to help out a company that is facing bankruptcy. They just can't do this any more. They need to just let them die."
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