Issues of debt, intensified competition and worker deployment remain

Freight trains carrying thermal coal are seen in Huaibei, East China's Anhui Province on Wednesday. Photo: CFP

Although China has achieved its annual targets of cutting overcapacity in the steel and coal sectors, experts warned Thursday that there are still a number of challenges ahead, including excessive debts, intensified competition among effective producers and the deployment of laid-off workers and assets.

During the three-day China-US Joint Commission on Commerce and Trade (JCCT) in Washington DC from Monday to Wednesday, US officials urged the Chinese authorities to "commit to hosting a global steel forum to deal with excess capacity before President Barack Obama leaves office," according to a statement on the World Trade Online website on Thursday.

The agenda during the JCCT meeting has once again put China's battle with overcapacity in the steel and coal sectors into the spotlight, which this year has yielded significant results.

Earlier in November, the National Development and Reform Commission, the country's top economic planner, announced that China came in ahead in its target of cutting 45 million tons of steel capacity, reaching the goal before the end of October. The country will also complete its 2016 goal of reducing 250 million tons of coal capacity before the year-end, according to the China National Coal Association on Wednesday.

As stockpiles decline, prices for steel and coal have rebounded. The price rally, combined with a recent infrastructure boom, has led to a profit turnaround among China's steel and coal companies. In the first nine months of 2016, profits of major steel companies reached 25.21 billion yuan ($3.65 billion), according to the China Iron and Steel Association.

Thanks to the combination of government policies and market forces, including on-the-spot visits and local governments' accountability systems, "China has closed a number of zombie companies and inefficient miners this year," Wang Guoqing, research director with the Beijing-based Lange Steel Information Research Center, told the Global Times on Thursday.

But Wang noted that pushing forward a similar agenda next year will be a much more difficult task.

Pressure remains

"At the initial stage, it's relatively easy to eliminate producers whose operating standards have not complied with government regulations, or those with inefficient and nominal capacity," Wang said, noting that this is one of the reasons behind the success of the government's goals in 2016.

However, as such companies are squeezed out, the remaining players in the domestic market are "larger ones that are able to produce high-standard products and make profits," Wang said. "In the next year, there will be fierce competition among these companies, especially those that produce similar products."

How to deploy laid-off employees and assets from factory closures also creates a persisting headache for the government, experts said.

In the next two to three years, the government plans to spend nearly 150 billion yuan to cover layoffs in the coal and steel sectors. Providing such subsidies may be helpful, "but it's not enough," Feng Liguo, an expert at Beijing-based China Enterprise Confederation, told the Global Times on Thursday. "Most of the employees in State-owned enterprises (SOEs) are in their 50s without transferable industry ability. They are also not the kind of quick learners who can find re-employment in a short time."

Feng suggested that the government should come up with a systematic training scheme to equip the laid-off workers with basic skills to serve as security guards, couriers, drivers or attendants.

Additionally, most steel and coal producers currently simply put aside manufacturing equipment and shut down factories to reduce capacity, which is not a long-term or sustainable solution, experts said.

In the coming years, "they need to follow up with a way to arrange those assets. For obsolete equipment, refining them to get iron may be a choice. But what will be done with effective and advanced devices?" Wang asked.

The corporate debt in the steel and coal sectors, which sits at 70 percent of total assets on average, could also derail the government's efforts to slash overcapacity, especially at a time when price jumps and speculative practices, such as scaling back production might spring up, Feng warned.

In October, the Chinese government unveiled a batch of measures for SOE reform, including a debt-for-equity swap plan to leverage SOEs' mounting debt.

"The goal of reducing capacity somewhat conflicts with the debt-for-equity swap," Wang said. "Cutting capacity is designed for obsolete producers to exit the market, while the reform scheme aims to secure their stakes."