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China's steel and coal capacity reduction effort on target

Reporter: Chen Tong 丨 CCTV.com

12-07-2016 16:43 BJT

Officials say China's steel and coal sectors have seen outstanding performances in their overcapacity reduction plans this year.

China's top economic planner says steel makers met the year's target last month,while coal producers are expected to complete their reduction before year's end. However, The production cuts have also driven up the price of coal and steel futures. Chen Tong reports. 

The National Development and Reform Commission says that the steel sector has cut 45 million tons worth of production, and that the coal sector will soon complete its 250 million ton target. As of the end of July, the steel sector had finished 47 percent of its capacity reduction target, and the coal sector had finished 38 percent. Industry actions to cut capacity were stepped up in the fourth quarter, thanks to government subsidies and tougher scrutiny.

"Most of the capacity had already been cut before 2016. The general environment and the prices this year were quite good, but despite that they didn't resume production, so we can treat this part as zombie capacity. Since subsidies were given based in part on this unused capacity, the speed of reduction was very quick."said Zhang Chengliang,senior analyst of Mysteel.com.

Zhang says most of the zombie capacity was in the steel sector, while most of the reductions in the coal sector came from mines that were actually in production. That's the reason, futures contracts for coal out-performed this year. Futures contracts for hard coke and coking coal have jumped over 100 percent.

"The reduction in coal capacity affected coal production, as with steel. But the impact on the steel industry was not as large as that on coal producers. So we've seen a stronger price rally in the coal sector from the first half of this year to the late third quarter, compared with the steel sector."Zhang Chengliang said.

Premier Li Keqiang said last month that the Chinese government will continue to strictly scrutinize any unapproved newly-established factories, as well as old productions facilities that have been ordered to phase out.

Zhang is also quite optimistic about the capacity reduction plan next year as a result of recent actions to further restrict property bubbles. As the property market eases, Zhang says the need for construction materials like rebar will also start to cool.

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