Thursday, September 1, 2016

China Just Can't Stop Producing Stuff

From FT Alphaville:

Sorry, but Chinese supply-side reforms may not actually have any impact on output or prices
You may remember that China is now apparently focused on so-called ‘supply-side’ reforms, a hodgepodge of market-orientated reforms focused on over-capacity and now handily grouped under one term.

You may also remember as part of that China said in April that it “will reduce the number of statutory working days for its coal miners to 276 a year from 330 as it bids to tackle a chronic supply glut that has sapped prices.”

And this is just a very good two pars on that from Macquarie:
While supply-side reforms are supposedly encouraging the elimination of inefficient producers to the benefit of more efficient producers, what we are seeing in coal under the “276 days” policy is the most efficient miners being forced to cut output in order to support inefficient, higher cost miners. This is purely being encouraged in an effort to raise coal prices and alleviate financial problems with coal miners failing to pay wages and defaulting on their debts.
However, looked at in another way, what we are seeing in coal embodies the political balancing act required to achieve supply-side reforms. While the longterm goal of reforms to consolidate and rationalise capacity may be positive, in the short term it is hard for local provinces and government to overcome the pain imposed from layoffs and debt write-offs.
It’s the kind of thing that lead Macquarie to believe that little “effective capacity” has actually been closed:

Since our 24 Feb report on supply-side reforms, there has been a lot of talk and news coverage on the issue. According to the NDRC, by the end of July only 28% of this year’s capacity cuts from coal had been achieved and 47% in steel. The State Council announced a nationwide inspection of local efforts at capacity closure to be started in August, which was a clear signal to the provincial leaders to increase their efforts to achieve closure targets....MORE