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China’s combat against overcapacity runs ahead of schedule

CHINA will achieve its annual capacity reduction target before scheduled, but oversupply in steel and coal sectors won't be changed by 2020, the National Development and Reform Commission said today.

The country will cut steel overcapacity as planned by October, while by November for the coal industry, NDRC said in a media briefing today. The state economic planner estimates that the demand of coal will stay at 4.1 billion tons by 2020, while the supply will remain at 4.6 billion tons that year.

Cutting overcapacity ranks high on the government's reform agenda as excess in raw material sectors have weighed on the country's overall economic performance.

China’s annual crude steel surplus is estimated at around 300 million tons, three times the annual output of Japan -- the world’s second-biggest producer.

The country has shut down steel plants with total capacity of over 90 million tons over the past five years and plans to reduce output by an additional 100 million to 150 million tons by 2020.

Government efforts weakening "zombie companies" in those sectors has pushed forward the reform as well, which can be reflected in seven default cases on state-owned enterprises in the last 12 months, including Dongbei Special Steep Group Co and Yunnan Coal Chemical Industry Group, Moody's Investors Service said.

"The government is leading the industry towards a gradual capacity reduction and it revealed clearer signals about the roadmap compared to a year ago," said Hu Kai, senior vice president who focuses on the state-owned enterprises at Moody's.

"The pressure of default outbreak in overcapacity industries is eased, as steel and coal companies posted better profit growth in the third quarter to improve the industrial fundamentals and take breath," Hu said.

But Hu pointed out that the battle to tackle excess capacity needs a stable policy as back up for at least two to three years, otherwise the back-and-forth would trigger price volatility of raw material market.

The price of coal has perked up since July this year which caused seasonally supply short in some areas of China this month. Though NDRC dismissed earlier that the months-long rally in coal prices are unsustainable, saying output from local mines would further replenish the country's stockpiles.


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