About Us  |   Contact Us  |   Register  | Login  |   

Follow HedgeWorld on Twitter HedgeWorld on LinkedIn






HEDGEWORLD NEWS
Search the News
Advanced News Search
HedgeWorld News by Region
United States / Americas
Europe
Asia / Australia
International
HedgeWorld News Sections
Managed Futures & Derivatives
Daily News
Regulatory/Legal
Strategies/Analysis
Technology
Opinion
People
Indexes
Other News Features
Most Popular
LexisNexis Headlines
Reuters Headlines
The HedgeWorld Blog
Alternative Advantage Daily Newsletter
RSS Service
Sign Up For Email News Alerts
Reprints



CORRECTED-COLUMN-China's moves to cut metal capacity just getting started: Clyde Russell
08/01/2013 Email this story  |  Printable Version

(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 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.

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 social sphere.

TREND DEVELOPING

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 effect.

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 curb imports.

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 sources.

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 desired result.

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)


Email This Story to a Friend   |   Display Printable Version of This Story

Story Copyright © 1999-2014 Reuters HedgeWorld All rights reserved.

HedgeWorld News is sponsored by:






Lipper    Privacy   User Policy  Legal Disclosure Copyright/DMCA  Site Map    FAQ    Glossary  Thomson Reuters for Hedge Funds
All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of HedgeWorld content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. HedgeWorld is a registered trademark of Thomson Reuters.