COLUMN-China’s moves to cut metal capacity just getting started – by Clyde Russell (Reuters U.S. – August 1, 2013)

Aug 1 (Reuters) – China’s plans to force more than 1,900 companies to cut excess capacity in bloated industries including aluminium, steel and copper have met with an underwhelming response from the market.

Certainly, the moves to make China’s heavy industries more efficient will have little immediate market impact, but what analysts and investors may be shrugging off a little too lightly is that once trends and processes start, they tend to gather momentum.

The edict to close some capacity by September will do very little to end surpluses in aluminium and steel production in China, as they will impact less than 1 percent of capacity.

In aluminium, about 260,000 tonnes of annual capacity may be shut, a fraction of the existing capacity of about 27 million tonnes, which is already about 28 percent higher than demand of about 21 million tonnes.

For steel, the ruling may result in about 7 million tonnes of annual output being idled, but the China steel association says there is 300 million tonnes of surplus capacity. In copper, some 654,000 tonnes of production may be closed, which is insignificant when compared with the existing idle capacity of more than 7 million tonnes.

On these numbers alone, the market is right to be sceptical about the impact of the July 25 announcement.

Aluminium output rose to an annualised rate of 22.42 million tonnes in June, and first-half production was almost 11 percent higher than for the same period last year.

The market dynamic at work in China appears to be that new, more efficient capacity is coming on line at a faster pace than older, uneconomic capacity is closed.

To make matters worse, much of the production that sits higher on the cost curve is being kept active through subsidies on power, largely from provincial governments more focused on keeping jobs.

It’s much the same story with steel, where mills would rather run at a loss than idle capacity and surrender market share.

But the question to ask is whether Beijing’s moves to trim excess and inefficient capacity will continue, or whether they will stall?

Investors and analysts tend to focus on each announcement in isolation, rather than viewing them as part of a process.

It would be unrealistic to expect China to make huge, sweeping changes in what are, after all, industries vital to economic development.

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