China aims to cut capacity, but difficulties persist
Several underperforming domestic steel mills have resumed operation after prices increased over the past month, experts said on Sunday, noting that most of those mills are not "zombie" companies.
For example, Hebei Province-based Tangshan Songting Iron and Steel Co resumed work in April after a 4-month suspension, the Economic Observer reported on Saturday.
"It is a market-driven move to restart business when steel mills see the hope of earning a profit," Wang Guoqing, research director at the Beijing Lange Steel Information Research Center, told the Global Times on Sunday.
"After a short-term suspension and taking time to raise funds, it makes sense for these steel mills to go back into operation. Most of the mills are not 'zombie' companies, so it is unnecessary to be too concerned," noted Wang.
The China Iron and Steel Association's composite index, which tracks the price of six major Chinese steel products, increased from 69.81 to 84.66 in April. The index rose more than 50 percent from the beginning of the year.
However, "steel prices will fluctuate lower in the coming two months due to seasonal factors," Wang Bei, a research manager from mysteel.com, told the Global Times Sunday. "Steel mills will be cautious about that, so not many mills will go back into operation in the future," she said.
Crude steel production in China increased 0.5 percent year-on-year to 69.42 million tons in April, the National Bureau of Statistics said on May 14.
China is facing increasing international pressure to reduce excess capacity in the steel sector. China is expected to cut 100 million to 150 million tons of crude steel capacity in the next five years, according to a statement by the central government in February.
"China still has a lot of difficulties in reducing excess steel capacity such as relocating laid-off employees," said Wang, the research director.
But China has showed a firm determination to reduce overcapacity, Wang said, noting that more specific measures are still needed to achieve results.
The central government will provide 27.64 billion yuan ($4.23 billion) to support local governments to close excess capacity in the steel and coal sectors in 2016, said a statement from the Ministry of Finance released Thursday.
Despite such efforts, there is great uncertainty over the pace of reducing overcapacity and rebalancing of supply and demand in China, according to a report by Moody's released in February.