China orders crackdown on industrial overcapacity

China Cabinet targets aluminum, steel overcapacity. Advancing efforts to head off overcapacity in key industrial sectors as domestic recovery gains steam, China's cabinet said Wednesday it would stop approving new projects for energy-intensive aluminum production for three years. The State Council, China's highest executive body, also issued new rules to contain excessive capacity in seven other sectors, including revisiting a years-long campaign to curb steel output. The move to ban new capacity in aluminum, a commonly-used metal in construction and power grid cables, is an ambitious policy step aimed at marshaling a sprawling, energy-guzzling and difficult-to-control industry. Still, the market largely shrugged off the news Wednesday, a day before the start of China's eight-day national holiday break. The benchmark December aluminum contract on the Shanghai Futures Exchange rose 1.2% to CNY14,800 a metric ton in the early session, while London Metal Exchange aluminum gained just 0.5% to $1,853 a ton as of 0330 GMT. "The worry in the industry isn't so much about new capacity, it's about the existing overcapacity," said Wang Zhouyi, senior base metals analyst for Shanghai Cifco Futures. The cabinet also wants to curb capacity at inefficient aluminum smelters by 800,000 tons over one year. But that might be cold comfort for a market faced with capacity nearing 20 million tons, and demand projected this year at around 16 million tons. Aluminum has been a major laggard in a wider rally among base metals this year, with prices rising just 23% while copper prices almost doubled and zinc prices climbed 42%. The ban isn't the first time China's cabinet has sought to control aluminum output. It issued an industry revitalization plan earlier this year with the broad aims of consolidating the industry and reducing overcapacity. "The items listed in the statement today are not really new compared with the (broad) aims that were written in the stimulus plan for the nonferrous metal industry back in February, so that's why we don't see much price movement today," said Wang Lin, an aluminum analyst with CRU, a metals consultancy. Even so, the government's efforts have so far met limited success. A move by the State Reserve Bureau earlier this year to stockpile 590,000 metric tons of aluminum failed to energize prices as effectively as the same efforts did for copper. The bureau's efforts were twinned with similar moves by provincial governments to bail out struggling smelters. The problem was that unbridled production swiftly returned every time prices showed signs of inching up. "Aluminum smelters are very flexible," Wang said. "They can pop up very fast, usually when prices recover, and they're quite difficult to control." As much as 3.5 million tons of idled aluminum smelting capacity have been brought back onstream since April, mainly in Henan, Qinghai and Guangxi provinces, Macquarie Bank said earlier this month. In addition, another 1 million tons of newly expanded production capacity was scheduled to come onstream before the year's end, as smelters jockeyed to profit from the dollar-driven metals rally, Macquarie said. Uncontrolled aluminum output has also been an irritant for policymakers for environmental considerations. Aluminum production is the most energy-intensive among base metals, with electricity charges accounting for nearly 50% of input costs. Cabinet acting to shape industry as growth accelerates. Last month, the State Council hinted that curbs might be in the works when it warned of overcapacity and redundant construction in such advanced industries as wind power and polysilicon equipment, as well as in traditional industries like steel, cement, flat glass and coal chemicals. As the domestic economy recovers, new problems are arising from the unprecedented amount of credit that have been released to bolster growth. While overcapacity has been an issue for years in key traditional industries like steel and aluminum, the warnings last month were Beijing's first toward more high-tech sectors that involve renewable energy, which have received state support in their development. Last month, the government underlined its concerns by discouraging certain imports of polysilicon, which is used for solar power, and certain wind power technology from its preferred list of imports. Beijing also underlined its policy determination to contain steel overcapacity Wednesday, reiterating its earlier stance that blast furnaces below 400 cubic meters would be eliminated by 2011, and setting some environmental requirements for steel mills. As with aluminum, analysts say the market is likely to remain unmoved, though they recognized that the policy may benefit larger steel mills that mainly produce high-end steel. "We noticed that some high-end steel products are not in the overcapacity list, and projects related with these high-end products may speed up," said Zhou Xizeng, chief steel analyst with Citic Securities Co.