Due to long-standing heavy investment on fixed assets and relatively repressed domestic consumption, China has witnessed much stronger growth in production capacity than in domestic demand in the past decade. Global financial crisis and shrinking foreign demand in 2008 would have shut down those outmoded plants that were saved by the subsequent government economy stimulus package and even showed signs of expansion. Currently, China is the largest producer of roughly 210 kinds of industrial products in the world. However, a majority of them are in the middle and low-end within global industrial chain and about 20% of them are from backward production capacity. In the long term, backward production capacity could severely constrain economic transformation and upgrading in China, not to mention its heavy burden on energy, raw materials, and environment. In the aftermath of economy stimulating investments and changing downstream demand, it becomes increasingly urgent to eliminate those backward production capacities.

In the first four years of the “Eleventh Five-Year” period (2006-2010), energy consumption per unit GDP in China dropped by 14.38%, yet still significantly lower than the preset target of 20%. Backward production capacity still takes fairly high shares in certain industries. For instances, there are backward production capacities of over 100 million tons and 500 million tons in steel smelting and cement manufacturing, respectively, about 20% of total production capacity each.

Increasingly Clear Target on Backward Production Capacity Elimination

In April 2010, State Council issued a notice on further eliminating backward production capacity, with clear targets set for the near future for ten key industries:

Electric power industry: By the end of 2010, to eliminate small-sized thermal power generating units with total capacity more than 50 million kilowatts.

Coal Industry: By the end of 2010, to close down 8,000 small-sized coal mines of resource consumption, environmental pollution, and incompliance with production safety and industrial policy, eliminating the capacity of 200 million tons.

Coke industry: By the end of 2010, to eliminate small coking plants with the coking chambers less than 4.3 meters high (however, excluding the stamp-charging coke ovens no less than 3.2 meters high).

Ferroalloy industry: By the end of 2010, to eliminate ore furnaces under 6,300 KVA.

Calcium carbide industry: By the end of 2010, to eliminate ore furnaces under 6,300 KVA.

Steel industry: By the end of 2011, to eliminate blast furnaces no more than 400 cubic meters, and both steel converters and electric furnaces no more than 30 tons.

Non-ferrous metal industry: By the end of 2011, to eliminate pre-baking anode electrolysis tanks no more than 100 KA.

Light industry: By the end of 2011, to eliminate the straw pulp production equipment with annual output less than 34,000 tons, the chemical pulping line with annual output less than 17,000 tons, the paper-making line with waste paper as raw materials and annual output less than 10,000 tons, the backward production technique for alcohol and the alcohol-producing enterprises (except those producing alcohol by waste molasses) with annual output less than 30,000 tons, the production equipment of monosodium glutamate with annual output less than 30,000 tons, the citric acid production equipment incompliant with environmental protection standard, and the leather production line with annual output less than 30,000 pieces.

Textile industry, and building-materials industry.

Great Significance of Energy Saving and Emission Reduction on Iron and Steel Industry

In order to hit the target of energy saving set for “the Eleventh Five-Year” period and accelerate restructuring iron and steel industry in China, State Council issued a document called Several Opinions on Further Saving Energy and Reducing Emission, and Accelerating Adjustments on Iron and Steel Industry (hereinafter referred to as The Document) on June 4th, 2010.

The Document states that iron and steel industry has the largest potential in saving energy and reducing emission and plays a decisive role in the campaign of energy saving and emission production. Energy saving and emission reduction helps the iron and steel industry adapt to skyrocketing iron ore price on international market, restrain excessive growth in steel production capacity, and eliminate backward production capacity.

In order to restrain excessive growth in steel production capacity and avoid repeated construction, The Document states that, except previously-approved projects, no steel projects related to production capacity expansion will be approved before the end of 2011. The Document also sets future concentration level target for the steel industry that the top ten steel producers shall represent over 60% of total domestic steel production from 44% in 2009.

By courtesy of ©ACMR-IBISWorld Reports, 2010

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