(Corrects India gold import tonnages for June, July in fifth
paragraph from bottom)
By Clyde Russell
LAUNCESTON, Australia, 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
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
It's much the same story with steel, where mills would
rather run at a loss than idle capacity and surrender market
But the question to ask is whether Beijing's moves to trim
excess and inefficient capacity will continue, or whether they
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
Much more likely is a fairly lengthy process in which steps
are gradual and aimed at creating minimal upheaval, not so much
in the market of various metals, but more in the political and
Taken together with moves by Beijing to limit pollution,
drive energy efficiency and rein in over-investment, it could be
argued that a clear trend is developing.
This trend is toward China limiting overall growth in
capacity for industrial metals, but also moving production
steadily lower on the cost curve.
This has major implications for producers of aluminium,
copper and steel outside China.
The market is often slow to recognise that government
policies can and do affect supply and demand for commodities,
because these decisions often take long periods of time to take
India's efforts to limit gold imports are a case in point.
When the government first raised the tax on gold imports
last year, the move was largely dismissed as insufficient to
curb the appetite of the world's largest bullion importer.
But what the market missed is that the Indian authorities
were determined to act to lower the current account deficit,
which reached 4.8 percent of gross domestic product in the year
to March 2013.
With gold accounting for 11 percent of imports by value,
second only to crude oil, the government kept taking steps to
The import tax has been raised twice more this year, and now
stands at 8 percent, with the last hike of 2 percentage points
coming in May, which also saw record gold imports of 162 tonnes.
However, June imports dropped sharply to around 32 tonnes
and July's to around 45 to 50 tonnes, according to trade
The increased tax and a ruling that one-fifth of all gold
imports should be exported as jewellery appears to have crushed
the appetite of India's buyers.
The point is that the market didn't really believe the
Indian government was serious about curbing imports, and it has
taken repeated steps to make the point.
And, if gold imports should regain momentum, I would expect
the government to continue to take steps until it gets the
The same sort of process may be underway in China, and it's
possible the government will continue to implement measures
until it achieves its goals, even if this takes years.
(Editing by Richard Pullin)