New year, new cuts stir debate about China's steel, coal excess

By Josephine Mason and David Stanway

BEIJING/SHANGHAI (Reuters) - The new year has ushered in a new round of capacity cuts as China tries to combat excess in its bloated steel and coal sectors, but the moves are a drop in the ocean in the nation's long struggle to make its heavy industry more efficient.

For years, Beijing has been seeking to cut the share of coal in its energy mix to contain pollution and meet climate change goals while streamlining its unwieldy and over-supplied smoke-stack industries such as steel.

It also comes as the government tries to focus the nation's economy away from heavy industry and cheap manufacturing in favor of the high tech and service sectors.

Beijing far exceeded its targets to eliminate 250 million tonnes of coal and 45 million tonnes of steel capacity last year.

In the first eleven months of the year, it had slashed a whopping 315 million tonnes of coal, according to Reuters' review of provincial data. In steel, capacity cuts were as high as 80 million tonnes, S&P Global Platts estimated.

Full-year output data will be released on Friday.

This year, the authorities have pledged to slash the same volumes from tens of thousands of plants and mines.

But the excess in both markets is so vast it will take until the end of the decade before the years-long push to shut down inefficient operations makes any inroads on oversupply and as regional governments remain wary of sweeping changes.

"Provinces that rely on steelmaking to provide employment will somehow have to generate new jobs and stop providing handouts to zombie mills for the sake of social stability. But this will not be a quick process," said Syliva Cao, steel analyst at S&P Global Platts.

Much of the outdated, inefficient operations are being replaced with leaner, cleaner ones.

New projects or expansions of existing operations already underway will unleash a whopping 1.5 billion tonnes of new coal supply on the market by the end of 2018, according to industry consultant Wood Mackenzie. That's just under half of current annual output.

It also threatens to add to the glut in raw materials that has drawn accusations from rival producers in the United States and elsewhere that the country is exporting its surplus, hurting prices and crippling competitors abroad.

"There's still a lot of (coal) excess. Even though provinces have announced capacity cuts, it won't impact output," said Liu Cong, coal associate at Wood Mackenzie.

"We're replacing old with new and still building new highly efficient mines."

OVERCAPACITY VS OVERPRODUCTION

Among the recent announcements, China's eastern province of Jiangsu was reported to be planning to phase out a total of 17.5 million tonnes of steel capacity by 2020.

But with total capacity estimated at 1.2 billion, the annual surplus could be as high as 400 million tonnes, which S&P Global Platts analysts say illustrates how far China still has to go to rationalize the bulging sector.

Most of the 2016 cuts were idled already, having little impact on actual supplies - output in for January-November 2016 was up 1.1 percent at around 740 million tonnes.

Against that backdrop, the run-up in prices and flurry of speculative buying that has pushed futures prices to multi-year highs in recent months may have been overdone.

"If you look at steel production last year, there was no change compared with 2015. .... The capacity cuts only changed the distribution of steel production, not the total amount," said Xu Zhongbo, head of Beijing Metal Consulting.

An analysis of provincial data illustrates the depth of the cuts in coal that led to a third straight year of lower output as the government pushes ahead with its shift to cleaner, renewable fuels.

Top producing regions Inner Mongolia, Shanxi and Shaanxi bore the brunt of the cuts, closing a combined 211.5 million tonnes of output in the first eleven months of last year, according to data from the National Bureau of Statistics, half of the nation's total closures over that period.

Shanxi will cut 20 million tonnes of capacity this year, while Hubei province plans to shut its coal mines within two years, state news agency Xinhua reported this week.

But the slowing growth of the world's second-largest economy, which will crimp manufacturing and demand for critical industrial products, have amplified the need for bigger cuts.

Analysts warned steel demand may be reaching a peak and coal-fired power output is expected to drop as energy-intensive industries like glass and cement slow.

In a sign of growing supplies, inventories of rebar <0#SH-REBAR-INV>, used in construction, hit their highest since April this week at 4.9 million tonnes, up by 1 million tonnes since the start of December.

(Additional reporting by Lusha Zhang and Beijing newsroom; Editing by Lincoln Feast)

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