Fantastic Article: "China’s Industrial Muscle Weakened"

Discussion in 'Economics' started by ByLoSellHi, Nov 25, 2008.


    China’s Industrial Muscle Weakened by Slowdown

    A giant, $3 billion steel mill opened by the Maanshan Iron and Steel Company to help meet China’s seemingly insatiable appetite for growth has ground to a halt.

    Published: November 25, 2008

    MAANSHAN, China —
    The Maanshan Iron and Steel Company recently opened a giant $3 billion steel mill on the outskirts of this city. The mill, which covers one and a half square miles and has its own power plant and shipping port, was built to help meet China’s seemingly insatiable appetite for growth.

    But during what should have been a peak production period two weeks ago, it was silent. Rolls of coiled steel sat near the end of a long assembly line as a few helmeted workers lounged about, playing with their mobile phones.

    Three blast furnaces and a line that produces H-beams for construction were also temporarily shuttered here at Maanshan, about an hour west of Nanjing.

    “Demand is definitely shrinking,” Wang Wei, an investor relations manager, said as he toured one of the brand-new plants. “Everyone is cutting back capacity.”

    It is happening faster than most anyone predicted: China’s economy, long the world’s fastest-growing major economy, is slowing down. Economists are forecasting that after growing nearly 12 percent last year, China’s economy could slow to 5.5 percent in the fourth quarter of this year — a stunning retreat for a country accustomed to boom times.

    Last week, banking regulators began warning about the risk of bad loans accumulating, and labor officials publicly worried about the possibility that mass layoffs would lead to unrest.

    “It’s the speed of the deceleration that scares people,” says Liang Hong, a Goldman Sachs economist who said she recently surveyed companies in China.

    The American recession is one big reason China’s epic economic growth is imperiled: as Americans buy less, China sells less. And China’s own efforts to keep its economy growing, through a stimulus package worth nearly $600 billion, may not replace a falloff in American demand as the United States’ recession deepens.

    The global downturn is already reaching deep into the heart of the country’s once-rapid industrial transformation — its steel, cement and construction companies — stalling dozens of multibillion-dollar investment projects. Plunging housing prices at home combined with a virtual global investment freeze have led to steel orders softening, steel prices plummeting, and inventories and losses piling up.

    Coast to interior, China’s aggressive building boom is no longer so aggressive.

    In Hebei Province, in north China, Capital Steel, one of China’s biggest steel makers, is building a $10 billion steel mill complex on an island, even though its profits are evaporating.

    In the eastern Chinese city of Hangzhou, Vanke — a huge real estate company — is spending more than $1 billion to build what amounts to a new city, with its own schools, a hospital and thousands of town houses at a time when the company is reporting a huge drop in sales.

    And in Macao, new construction is grinding to a halt on one of the world’s biggest real estate developments — a massive casino and hotel complex whose cost has been estimated at $20 billion — because of huge debt obligations. About 10,000 people could lose their jobs.

    Nationally, Chinese officials say their country faces a grim situation. New economic data released over the last weeks is beginning to reveal the extent of the slowdown in China.

    This year, housing sales in big cities have plunged by as much as 40 percent from a year ago. Government revenue was down in October. And last month, industrial production registered its weakest growth in seven years.

    “Growth is deteriorating fast,” says Andrew Driscoll, a China resource analyst at CLSA, the investment bank. “We’re not talking about China’s growth going backwards. But when supply is geared toward 10 percent growth, and it comes down to 5 percent, you have excess supply.”

    To cope, Beijing recently approved the biggest economic stimulus effort in China’s history: a $586 billion package over two years, aimed at shoring up the very industries that seem to be faltering — steel, cement and companies engaged in building.

    The government also approved other emergency measures, including tax relief, export rebates and housing policies. One Beijing official even said the government could spend more than $586 billion.

    The government is promising fast approvals for local governments to build subsidized housing, railways and airports, and even nuclear power plants. Fixed-asset investment — or spending on things like housing and manufacturing plants — accounts for about 45 percent of the nation’s economy, and that is the focus of the effort, analysts say.

    Just months ago, Chinese leaders were warning that growth was too strong and risked stoking inflation. Now, Chinese officials say they want to do their part to keep the global economy from slipping into recession.

    In America, consumers have closed their wallets. Parts of Europe are already in recession. And in Asia, Japan and Hong Kong now say that they too have slid into recession.

    The ripple effects are being felt everywhere in China. Hard-hit airlines and automakers have appealed for government aid. Local governments that raised millions of dollars auctioning off land rights are confronting lower bids and depressed sales, which essentially means lower tax revenue.

    Lead smelters, which produce material for the battery industry, and aluminum producers are shutting down production lines. And cement makers — one of the pillar industries in a nation perpetually under construction — are depressed.

    “This is a bleak winter for the cement industry,” says Yang Dongsen, an analyst at Merchant Securities in Shenzhen. “There’s a nose dive in real estate construction. In south China and east China, two places where real estate boomed, many projects have suddenly stalled.”

    Last month, electricity production in China dropped for the first time since early 2005, a sign that big industry, the largest consumer of power, is in retreat.

    “Global commodity prices collapsed. People got scared, and many activities just stopped,” said Liang Hong, the Goldman Sachs economist. “Many turned off the lights.”

    Steel producers are among the worst off. Slowing demand has forced many to idle plants. Australian and Brazilian iron ore suppliers — which reaped huge profits from China’s building boom — say demand from China has already slowed sharply.

    Here at Maanshan Iron and Steel, executives are pondering what happened just after the middle of the year, after they began operating a huge new mill that they say is much more efficient than older mills. Maanshan’s average steel price peaked at $768 a ton around June, then began falling sharply. In November, prices dipped as low as $490 a ton.

    Steel executives say weak consumer spending reduced demand for things like cars and refrigerators that contain finished steel. But most say falling property prices had an even bigger impact.

    Maanshan recently reduced its production by about 15 percent. But company executives say they are hopeful about the government rescue effort, one that will put China back to building.

    “I’m quite optimistic about the stimulus package,” Hu Shunliang, board secretary at Maanshan Iron and Steel, said in an interview. “It’s not just theater. It will stimulate other industries and help bring us more investment.”

    Chen Yang contributed research from Shanghai.
  2. Good article.

    But it's not much of a surprise given that Beijing and its neighboring boroughs were shut down for the Olympics in August, with the Para-Olympics keeping much of the industrial area shuttered till September 20th when the games ended.

    Also, I'm sure that a National Holiday period in the first week of October did not help the "demand" side of the equation, either. It's a 7th day Holiday that starts in late September and lasts till October 5th.

    And at the end of the day, the USA is 25% of their market.

    Chinese officials were most likely expecting a "snap-back" in production and sales once the Olympics were over and are now worried about where real demand has gone.
  3. Steel might not be the best indicator as the overcapacity arises from every province feeling that it had to have its own steelworks as a status symbol.
  4. Shandong and Hubei provinces have been told they must seek official consent if they
    want to lay off more than 40 people. In Shandong 700K people have lost their jobs this
    year and in coastal Guangdong province 67,000 businesses have closed, wages have
    been 'reduced' by up to 75% - China's GDP is closer to 0% than 5% and falling
  5. At a time when all world countries are experiencing slowdowns in the pace of 'economic activity', it is a great moment in time to pay attention to 'getting our houses in order', and laying the groundwork for the future by preparations in our respective infrastructures, most notably, becoming less dependant globally on fossil fuels, and becoming more energy independant.

    Who the heck sez, and where is it written that we have to be on a constant export-driven frenzy...we can stop / slow down every once in a while, and that is an excellent time to put things in place for future economic well-being that is based on firmer, more sustainable foundations.

    Also, in the recent past, as oil prices have abated, we now are hearing that alternative energy infrastructure developemnt(s) are not as economically viable, etc. I view this dynamic as a godsend, and see at as a great time to move with full force into developing alternatives...better now, while we are not as behind the eight ball, or, over a barrel, if you prefer that old saying, and as we wean ourselves off oil, slowly and steadily, the very fact of decreasing our reliance on oil, should put steady downward price pressures on oil, thus rewarding our good efforts, and encouraging us to continue on that path.

    I see this dyanmic yielding terrific results for many nations, especially in this time period we are in. We can look back, in time, and be proud of our accomplishments, and say that in the face of adversity, we took bold action to better prepare ourselves.