SCIO briefing on the 'new normal' in the Chinese economy and deepening supply-side structural reform
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E-mail China.org.cn, January 10, 2017
Reuters:
Last year, the capacity of steel and coal was met ahead of schedule, and the price of steel was also drive up. How do you explain this? And how do you expect undertaking the task of cutting industrial capacity in 2017, and promoting the work more effectively? Thank you.
Xu Shaoshi:
While cutting capacity of steel and coal industries last year, we continuously followed, analyzed and judged the price change. I can tell you that the price has changed a lot. We also analyzed why the price changed so much, and there are four reasons. Firstly, the price went too far down when economic growth slowed down. Secondly, thanks to a stable economy, enterprises need to restock. Thirdly, steel and coal enterprises initiatively reduced their capacity according to the demand of cutting capacity. Fourthly, due to an intensification of cutting capacity, the quantity of supply will reduce while the price will return to normal. However as a whole, there is no fundamental change in supply and demand, and the price fluctuation is a comprehensive result of short-term elements, which is in line with the trend of an economy moving steadily in the right direction with demand increasing.
There are also some relatively complex elements. For example, during July to November last year, the growth of generated electricity reached 6.8 to 8 percent, but the growth in the first half year was only 1 percent. The growth of generated electricity increased the demand for electricity-coal, which at least needed to increase 60 million tons according to our estimates. Transport capacity is another complex reason. Overload and overrun control on railway capacity, especially the maintenance of Datong-Qinhuangdao Line last October, reduced about 200,000 tons of capacity every day. In addition, after last October, some money flew to the futures market, which raised coal prices, and had a relatively complex effect from a view of short-term comprehensive events.
As to such conditions, we have conducted a series of measures jointly with relevant departments and industry associations. Firstly, we have orderly released highly effective and advanced capacity to increase output. Secondly, we have guided coal and electric power enterprises to sign long-acting agreements or contracts with coal enterprises to change their trade model, which is expected to play a positive role. Thirdly, we have normalized compiling and publishing a coal price index. Currently, we have two large coal price indexes: Bohai-Rim Steam-Coal Price Index (BSPI), a price index of 5,500 kilocalorie coal in Qinhuangdao, and the CCI Index, also known as Fenwei Index in Shanxi. We have invited related experts to help them normalize and publish such indexes, so as to guide expectations in the right direction. Fourthly, we have normalized coal sales and strengthened transportation guarantees of railways. The China Railway Corporation has supported a lot in this area and provided 5 million tons of transport capacity and 85,000 carriages each day to meet the needs of heating and electricity in north China.
The demand to cut production capability will be higher this year. We are working on the 2017 plan to cut production capability of steel and coal. The plan will be put out before the Chinese Spring Festival and will set the goals scientifically. We must further improve the safety standards and identification standards for outdated capacity. We must deal with the "zombie enterprise" as a first priority and close them down more quickly.
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