Subsidies stoke steel sector woes

The past year hasn't been kind to China's steel mills. Throughout much of 2014, the industry scene was one of general sluggishness punctuated by periodic accounts of production shutdowns and mill bankruptcies.

The root cause behind the losses of so many State-owned mills and the precipitous decline in steel prices lies in the way the industry operates - not clichéd excuses about raw material prices, overcapacity or shrinking demand. For years, local authorities have offered huge subsidies to local mills, eventually pushing production far ahead of market demand. If this situation cannot be addressed, the industry will remain trapped in a vicious cycle.

First, an exit mechanism should be established to let the market eliminate outdated mills. Second, cross-region mergers and restructurings should be encouraged to reduce competition between overlapping products. Third, reforms should be made to State-owned mills which are suffering losses or are on the verge of losses. To improve efficiency and innovation, private capital should be allowed to take part in this process.

For their part, local authorities need to take their fingers out of the pie. If they cannot stop meddling, problems like excess capacity, vicious competition and low efficiency will never be improved.