Govt to cut capacity in cement, steel sectors

The steel and cement sectors are among the key targets of an overall plan to reduce overcapacity, which has been completed by the National Development and Reform Commission and the Ministry of Industry and Information Technology, the China Securities Journal reported on Tuesday, citing anonymous sources.

The report said that the steel, cement, electrolytic aluminum, flat glass and shipbuilding industries are the five key targets for the crackdown.

Authorities will use technological standards as a way to phase out outdated facilities and capacity, and will make sure that over 80 percent of the existing facilities will be utilized, the sources said.

The NDRC and the ministry declined to confirm the report.

The report came four days after the ministry ordered a crackdown in overcapacity in 19 industries across the country.

More than 1,200 companies, including 19 listed companies, were told to cut their production capacity, according to a statement released by the ministry.

The cement, steel, electrolytic aluminum, ferroalloy, copper smelting, chemical fiber and papermaking industries were among the ones required to cut excess capacity, the statement said.

Some firms were ordered to stop production by the end of September, and the deadline for their complete elimination was set for the end of the year. Involved companies were labeled as "the first batch", suggesting there will be more to come.

Hu Kai, a senior analyst with credit rating agency Moody's Investors Service, said that curbing excess capacity through technological standards shows that authorities will mainly rely on market mechanisms to solve the problem.

The Chinese central government has called for a reduction of overcapacity in some industries for years, but previous ways to achieve this objective mainly relied on setting levels for the companies' capacity. Factories with a capacity below a certain level were ordered to shut down. However, the move encouraged some companies to ramp up their capacity to meet the new levels, experts said.

"Consolidation is surely positive news for leading companies in each industry. But based on the government's previous performance, we have to wait and see whether the latest move will effectively alleviate the issue," Hu said.

Overproduction has led to price-cutting wars in some sectors, and has depressed companies' profits. But many local governments are reluctant to implement orders to curb overcapacity as they rely heavily on some of these industrial companies for fiscal revenue.

Profits from major industrial companies fell 2.3 percent in June after an 8.8 percent increase in May, the National Bureau of Statistics said on July 27.

Yang Mei, an analyst with Kaiyuan Securities, said the move to reduce overcapacity has had a very limited effect on individual stocks, as the market is well aware of these industries' lackluster performance.