A steel factory in Taiyuan, Shanxi province. (Photo/Xinhua)
Chinese industries are caught in a vicious circle of over-production and loss, owing to conflicting government policies and expectations, according to the Guangzhou-based 21st Century Business Herald.
The country's producer price index dropped by a total of 1.9% this year due to overproduction, which includes a 5.6% slump in ferrous metals and a 2.6% fall in non-ferrous metals sectors.
The country's steel industry produced 2.2 million tonnes of steel per day in February, which was a historic high and will ultimately drive up annual production to 800 million tonnes. The record production came despite most producers operating at a loss.
Aluminum production increased from 24 million tonnes in 2011 to 26 million tonnes in 2012, yet only 20 million tonnes were sold in 2012.
The slump in prices caused by overproduction has prompted the government to close outdated and inefficient plants, especially those which were producing iron, steel, electrolytic aluminum and coke. Despite closing plants, a different government agency has contrarily offered to subsidize electricity for the non-ferrous metal industry, especially for aluminum factories.
The conflicting policies are a result of the closure plan being formulated and carried out by the Ministry of Industry and Information Technology, while the electricity subsidies program is administered by the National Development and Reform Commission.
The two organizations did not know what the other was planning, said the 21st Century Business Herald.
Local governments are also expected to go out of their way to save enterprises within their jurisdiction and to prevent local residents from becoming unemployed, with the governments of Sichuan, Ningxia and Guizhou unveiling separate programs that offer subsidies to industries, especially aluminum plants, the newspaper said.
The government's subsidies enabled many loss-making industries to keep afloat and expand their production. But the result was a market glut caused by the excess supply which has driven down prices even further, said the report.
The paper quoted Li Xunlei, chief economist at the Haitong Securities Group, as saying that local governments can't sustain their region's growth by just increasing production. The country won't benefit from piles of unsold inventory and should try to increase people's income levels and release their purchasing power instead, said the economist.
Li Xunlei 李迅雷