Hands tied

China has too much steel. And cement. And glass. It’s something that can’t be hidden by stimulus spending on infrastructure; the scale of the overcapacity is simply too vast. The country’s steel production capacity is full third more – an extra 200 million metric tons per year – than it can consume, and the highly fragmented nature of that sector in particular has made it next-to-impossible to regulate.

Local governments have been fiercely protective of these labor-intensive, tax-generating industries, and mill owners are known for starting up and shutting down production depending on the direction of the market, with little regard for central government plans for the sector.

That has not kept Beijing from trying. The latest attempt to corral and cull steel mills comes in the form of a new plan to shut down smaller plants with capacities of 16 million tons. The government wants to close these plants as construction on new, more modern mills nears completion; it does not relish the prospect of the new mills simply adding to existing capacity.

The specific target may be different, but the ultimate goal is one we’ve heard before. Unfortunately, given the present high demand for steel – particularly of "long" steels such as rebar, which are relatively cheap to produce – it’s hard to see how Beijing will have much success in shutting down errant mills.

The Politburo’s announcement last week that Beijing would maintain current economic policy into 2010 may exacerbate the problem. It was the government’s efforts to revive the economy – stimulus spending plus an easing of restrictions on the housing market – that helped fuel the construction boom, raising demand for steel products. Real progress in consolidation may have to wait until Beijing feels comfortable imposing tighter monetary policy and gets tough again on property investors. Starved of construction-led demand and easy access to bank loans, smaller mills may be forced to close up shop. The trick then will be making sure they stay closed.