China Ministry of Industry & IT issued on May 14, 2009 an urgent notification to require local governments to curb the excessive growth in crude steel output. It’s the first time for the ministry to announce such a notification since its establishment in 2008. The statement described Chinese steel industry with a series of contradictions and problems, like severe overproduction of crude steel, high ratio of backward capacity, blind resumption of normal production, excessive pileups of imported iron ore.
According to the official document, given that downstream sectors have not resumed fully, Chinese steel industry must put overall-output-control as a priority, should firmly curb excessive growth in crude steel output, should shut down those ironmaking, steelmaking, steelrolling production lines in the elimination list, commercial banks should cut or even halt loans to steelmakers with blind expansion plans. The notification also required to strictly implement differential power rates to eliminate backward capacity. The backward capacity elimination has been a long-discussed topic in China. However, can the Ministry of Industry & IT fulfill its goal via publishing such an urgent notification? It’s hard, said Liu Hanmin, vice directory of China Metallurgical Industrial Economic Development & Research Institute. “The purpose is hard to be realized via sending commands and assigning quotas to local governments.” An enterprise, as long as it’s legal, harmless to the society, has the rights to exist, according to market economic rules. The role for a government to play is to create fair competition environment for enterprises by perfecting rules and laws. In the first two months of 2009, China’s steel production began a new round of resumption in not only small mills, but also those giants. Some state-owned steelmakers realized that if the production limits continue, they will lag behind those private ones. Buoyed by the RMB4 trillion stimulus package, demand for steel products resumes modestly in China, and steel stocks also increase. “The urgent notification indicates central government’s attitude”.
A government should ensure that an enterprise is legal and harmless to the society. For instance, the pollutant emission and product quality should meet state standards, working environment should follow China Labor law.
“The enterprises that meet above conditions and shoulder their responsibility have the rights to exist. as for the technology and capacity, it’s an enterprise’ own business,” said Liu. China did not implement pollutant emission standards, but define new capacity standard for steel mills. It’s not a solution to eliminate backward capacity via administrative means. Local government and industrial associations are hard to limit production. In order to “secure growth”, some governments even required mills not to limit production. Most members of steel industry associations are those big steelmakers. Once they limit normal production, the industry may repeat the same mistake occurred around 2000, “limit big steelmakers, free small mills”. Furthermore, as high quality assets of banks, private steel mills in China do have competitive edge compared with those giants. So banks are also hard to follow loan limitations. The key role for governments to play is creating fair competition atmosphere for enterprises. State-owned steelmakers should vie with private mills by enhancing their own competitive edge. “Although standing in front ranking among Chinese state-owned enterprises, Baosteel decided to squeeze 30% of its management expenditure to fight against global financial crisis. This move shows that there remains huge room for the rest to promote management efficiency.” Liu also pointed out that private mills have a much higher labor production rate compared with state-owned ones. Without government direct interference, Chinese private mills might not be eliminated by market. The private mills in China are very likely to surpass state-owned ones in next five to ten years.
According to the official document, given that downstream sectors have not resumed fully, Chinese steel industry must put overall-output-control as a priority, should firmly curb excessive growth in crude steel output, should shut down those ironmaking, steelmaking, steelrolling production lines in the elimination list, commercial banks should cut or even halt loans to steelmakers with blind expansion plans. The notification also required to strictly implement differential power rates to eliminate backward capacity. The backward capacity elimination has been a long-discussed topic in China. However, can the Ministry of Industry & IT fulfill its goal via publishing such an urgent notification? It’s hard, said Liu Hanmin, vice directory of China Metallurgical Industrial Economic Development & Research Institute. “The purpose is hard to be realized via sending commands and assigning quotas to local governments.” An enterprise, as long as it’s legal, harmless to the society, has the rights to exist, according to market economic rules. The role for a government to play is to create fair competition environment for enterprises by perfecting rules and laws. In the first two months of 2009, China’s steel production began a new round of resumption in not only small mills, but also those giants. Some state-owned steelmakers realized that if the production limits continue, they will lag behind those private ones. Buoyed by the RMB4 trillion stimulus package, demand for steel products resumes modestly in China, and steel stocks also increase. “The urgent notification indicates central government’s attitude”.
A government should ensure that an enterprise is legal and harmless to the society. For instance, the pollutant emission and product quality should meet state standards, working environment should follow China Labor law.
“The enterprises that meet above conditions and shoulder their responsibility have the rights to exist. as for the technology and capacity, it’s an enterprise’ own business,” said Liu. China did not implement pollutant emission standards, but define new capacity standard for steel mills. It’s not a solution to eliminate backward capacity via administrative means. Local government and industrial associations are hard to limit production. In order to “secure growth”, some governments even required mills not to limit production. Most members of steel industry associations are those big steelmakers. Once they limit normal production, the industry may repeat the same mistake occurred around 2000, “limit big steelmakers, free small mills”. Furthermore, as high quality assets of banks, private steel mills in China do have competitive edge compared with those giants. So banks are also hard to follow loan limitations. The key role for governments to play is creating fair competition atmosphere for enterprises. State-owned steelmakers should vie with private mills by enhancing their own competitive edge. “Although standing in front ranking among Chinese state-owned enterprises, Baosteel decided to squeeze 30% of its management expenditure to fight against global financial crisis. This move shows that there remains huge room for the rest to promote management efficiency.” Liu also pointed out that private mills have a much higher labor production rate compared with state-owned ones. Without government direct interference, Chinese private mills might not be eliminated by market. The private mills in China are very likely to surpass state-owned ones in next five to ten years.
(My Steel, China)
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