China's Efforts to Cut Overcapacity, Zombie Firms in Coal, Steel Sectors Are Proving Successful
Dong Xin
/SOURCE : Yicai
China's Efforts to Cut Overcapacity, Zombie Firms in Coal, Steel Sectors Are Proving Successful

(Yicai Global) Aug. 1 -- Supply and demand in the coal and steel markets have improved significantly through effective overcapacity reduction and efforts to eliminate zombie companies, industry insiders told Yicai Global.

Excess production capacity in the coal sector has been cut by about 111 million tons so far this year, fulfilling 74 percent of the full-year target, according to the latest data from the National Development and Reform Commission. Some 40 million tons have been phased out of the steel sector and low-quality billet factories producing more than 100 million tons have been shut down.

Industrial capacity utilization and corporate profits have increased substantially in these sectors thanks to this effective reduction in overcapacity, Hu Chi, an analyst at the State-Owned Assets Supervision and Administration Commission's research center, told Yicai Global.

"State-owned enterprises posted consistent increases in added value and profits this year," he said, "and supply and demand have enhanced with the cleanup of zombie companies. This trend looks set to continue with endogenous economic growth gaining momentum."

Steel prices, especially rebar prices, have been on an upward trajectory following the crackdown on low-quality billets, said Liu Jianhui, deputy director of the East China branch of the Central Iron & Steel Research Institute. A rebound in billet production capacity is unlikely as the public is increasingly aware of the quality defects of these products and their impact on the environment, he added.  

Overcapacity cuts have led to increases in coal companies' earnings, Gao Feng, deputy head of the marketing center at Yankuang Group, told Yicai Global in an interview. The companies used the extra income to repay loans they borrowed during the market downturn in recent years, and part of the money has been spent on work safety and environmental protection operations.

In the first half, the average industrial capacity utilization rate rose 3.4 percentage points on the year to 76.4 percent, data published by the National Bureau of Statistics shows. Industrial added value grew 6.9 percent, marking a 0.9-point rise in growth rate compared with the same period last year.

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Keywords: Overcapacity , Coal , Steel