Trajectory for Industrial Upgrade

By LIU YUNYUN

Trajectory for Industrial Upgrade

By LIU YUNYUN

Deadline is approaching for factories that are forced to close down

The Ministry of Industry and Information Technology (MIIT) ordered the closure of outdated production lines in 18 industries as part of the country’s plan to upgrade its industrial structure and move up the value chain.

On its website, MIIT posted a list of 2,087 factories that are operating on outdated lines and said those production lines must be closed by the end of September 2010.

The 18 affected industries are iron, steel, coke, ferroalloy, calcium carbide, electrolytic aluminium, copper smelting, lead smelting, zinc smelting, cement, glass, paper, alcohol, monosodium glutamate, citric acid, tanning, dyeing and chemical fibers.

The most affected provinces are Henan with 230 factory closures, Shanxi, with 226 closures, and Zhejiang, with 180 closures. All of the closures are expected to result in substantial job losses.

More than necessary

On August 3, a few days before the MIIT’s issuance, it was announced that energy consumption per unit of GDP in the first six months of this year rose 0.09 percent from one year ago, according to official figures jointly issued by the National Bureau of Statistics, the National Development and Reform Commission and the National Bureau of Energy.

In order to reach the energy consumption reduction target proposed in the 11th Five-Year Plan (2006-10), China must cut energy consumption per unit of GDP by 5.2 percent from 2009 to 2010.

Judging by the disappointing first-half performance, the energy consumption goal may be far-fetched.

China is the world’s largest steel producer and a major producer of other industrial materials, as well. New facilities are equipped with the latest technologies, but there are thousands of small, outdated businesses that local authorities are reluctant to close, due to concerns over job losses and tax revenue decreases.

Li Yizhong, Minister of MIIT, said that outdated means of production consume a large amount of energy and resources, create a high level of pollution and have many safety problems. Li stated the closure of the outdated production lines will make more room for advanced production, and said that profit-seeking factories tend to ignore environmental responsibility and prefer to operate older lines unless those lines are entirely dismantled.

Any company that defies the decree will face punishment, the MIIT said on its website. The government will revoke the safety licenses and pollution discharge permits of factories that fail to shut down the identified facilities. Financial institutions and local land resource departments will not be permitted to offer credit of any kind or approve new land for production expansion to such factories. Power companies will also have the right to cut the power supplies to violating businesses.

But those businesses which quickly abolish backward capacities will benefit from favorable policies in terms of financing, investment and land resources.

Most of the blacklisted factories are pri-vately owned, while some belong to listed companies. After the MIIT announcement, involved listed companies made reports on potential impacts. Zhejiang Hangmin Stock Co. Ltd., a printing and dyeing company, said two of its subsidiaries will have to abandon 13-15 percent of their production capacities. The company said it is not just conforming to the government’s orders, but is also moving forward with a plan to upgrade its technology and facilities.

The closures are part of China’s current economic restructuring efforts. Getting rid of outdated means of production will promote industrial development and improve China’s competitiveness in the international market.

China has set an ambitious target of cutting energy consumption per unit of GDP by 20 percent between 2006 and 2010, and has vowed to cut greenhouse gas emissions by 45 percent by 2020. The closures will help reach these goals.

Not enough

Huang Jingan, Chairman of the China Coking Industry Association, said the current annual output of coke in China now stands at around 400 million tons, but the estimated coke demand in 2010 is no more than 300 million tons. Huang said the math is simple and that excess coke would amount to 100 million tons.

The coke capacity slated for elimination accounts for 7 percent of the nation’s total, which is only one quarter of the excess coke.

Huang said coke overcapacity can not be resolved unless more forceful measures are taken.

MIIT Minister Li Yizhong stated that steel overcapacity has also been a major issue and suggested not building new iron and steel projects for three years.

Previously, the MIIT allowed factories to build new facilities to replace old ones so long as they passed an environmental appraisal. Analysts contend this is one reason the overcapacity problem is worsening.

The State Council held the first meeting on the subject of cutting overcapacity in 2005. Since then, the Central Government has taken various measures to curb the excess capacity. But as Huang pointed out, the problem has become even more serious in the past five years.

Beijing Business Todayquoted an industrial insider, who declined to be named and said that while determination is one thing, implementation is another. Local governments, faced with the pressure of potential tax revenue decreases and job losses, may turn a deaf ear to the decree. According to precedent, he said, in order to avoid punishment, steel mills may shut down blacklisted lines for the time being, and then restart operations after government inspectors leave.

TEARING APART: Workers at Datang (Hebei) Matou Power Co. dismantle the high-pollution, low-efficiency thermal power generators

Xiang Weida, head of the research department of Great Wall Securities Co. Ltd., said that while it is important to phase out backward capacity, the government must make sure those outdated facilities and factories are indeed shut down and must prevent the managers from relocating the facilities to remote and less developed regions.

Some don’t feel that government intervention is necessary, though. Huang said the reason for the survival of small steel mills and coke ovens reflects market demand. “If the steel has indeed become excess with the price falling apart, how can those small factories maintain operation? They may have collapsed without any government intervention,” Huang said.

Huang suggested the government stay on the sidelines and let the market judge which should stay and which should go. The government should be more prudent in issuing environmental and land approval to factories that are not qualified for green production.

Growing pains

Guangfa Securities Co. Ltd. said in a report that the elimination of outdated coke capacity could lead to a hike in coke prices as supply falls. Likewise, the product prices of the 17 other listed industries would rise.

Within a week of the MIIT announcement, the average price of steel rose 1.2 percent, a report conducted by Guangfa Securities Co. Ltd. said.

In July 2010, China’s consumer price index (CPI), a main gauge for inflation, rose 3.3 percent, surpassing the safe level of 3 percent. A 3 percent-plus CPI growth indicates inflationary tendency.

The reduction in supply, resulting from factory shutdowns, will add more inflationary pressure in the second half of the year.

On August 11, MIIT published a notice on its website relating to the upgrading of the iron and steel industry. The notice stated that small mills whose 2009 output was below 1 million tons have two options: merge with larger mills or go bankrupt.

Since most of the outdated capacity belongs to small and private companies, fears arose that the massive closures will result in a trend of big, state-owned enterprises gradually taking control of the industry. The worry was that a monopoly was inevitable.

“Outdated factory shutdowns will benefit the listed companies in the long run as they are the bellwether of the industries with more advanced technology,”said Liu Yuanrui, iron and steel analyst at Changjiang Securities Co. Ltd. The deeppocketed listed companies will deal a further blow to smaller ones as they can easily receive financing from either the stock markets or the banks.

Analysts have argued that making advanced technologies and capital more available to private companies will allow them to compete and will strike a balance in the market.