China has trimmed its 2017 growth target to around 6.5% and has revealed plans to again try and cut excess steel, coal mining and coal fired powered generating capacity.
The question now for investors in commodity companies is whether these cuts will see a rerun of the commodity price surge in the second half of last year in coming months?
Last year’s steel and coal cuts, allied with a surge in real estate spending, saw commodity prices, led by coal and iron ore, rebound sharply from their multi-year lows in the first three months of 2016.
Prices for coking and steaming coal have since fallen back, but iron ore pries remain over $US90 a tonne which is around two year highs.
While coal output fell last year, imports jumped 25% as steel mills chased high quality coking coal. Imports of Australian coal jumped 70% in January from a year earlier (when they fell sharply)
China’s powerful National Development and Reform Commission (NDRC) revealed the closure plans as the first day of the 2017 National Congress saying it would shut or stop construction of coal-fired power plants with capacity of more than 50 million kilowatts.
The Commission also said that China will also cut steel capacity by 50 million tonnes and coal output by more than 150 million tonnes this year.
The fixed-asset investment target for this year is a rise of around 8.5%, down from last year’s target of 10.5%. Seeing the 2016 investment performance undershot that target, this year’s figure is flexible and an indicator only.
If the government does take a hardline on debt, as the Premier indicated it would yesterday, that might crimp the property boom which has started fading in some cities where local controls have been imposed.
A Chinese official said on Saturday that the government would not be imposing any sort of nationwide property tax to control the sector. Some cities such as Shanghai have imposed local taxes to try and control the property boom in their areas.
In its report, the NDRC said it would cut energy consumption per capita by 3.4% and lower carbon intensity by 4% as well in 2017.
And by 2020, the government has said it aims to close between 100 million-150 million tonnes of steel capacity and 800 million tonnes of coal mining capacity.
This year’s targets come after the world’s top coal consumer and steel maker far exceeded its 2016 goals to eliminate 250 million tonnes of coal and 45 million tonnes of steel capacity.
Much of the steel capacity was already idled and output actually rose 1.2% to 808.4 million tonnes.
Coal output last year fell 9% to 3.64 billion tonnes, but imports jumped 25% to 255 million tonnes, and the restrictions on output were dropped for the current ‘heating season’ in northern China to make sure power stations did not run short of coal and electricity prices did not spike uncontrollably higher.
The so-called heating season ends this month and analysts are waiting for the NDRC to reinstate either last year’s so-called 276 guidelines (which cut coal mines operating days to 276 a year) or release new guidelines for 2017.
Premier Li Keqiang told the first day of the congress that the government was still pursuing its plan to ramp up monitoring of heavy industry and crack down on companies and officials that violate air quality rules.
“Officials who do a poor job in enforcing the law, knowingly allow environmental violations, or respond inadequately to worsening air quality will be held accountable," he said.
“We will make our skies blue again,” he was quoted as saying by Chinese and international media.
As well as trimming its growth target for this year the government also made sure that it will pursue reforms to address a rapid build-up in debt, and constructs a “firewall” against financial risks.
A growth rate of 6.5% will be lower than 2016’s 6.7% which was a 26 year low (so a new 26 year is in sight).
The target for consumer price inflation this year was kept unchanged at 3%.
Mr Li said the government will continue to implement a proactive fiscal policy and maintain a prudent monetary policy adding that government would press on with supply-side reforms and take steps to control risks and ensure safety in the financial sector.
"At present, overall, systemic risks are under control. But we must be fully alert to the build-up of risks,” Li said.
He said the government is also looking to shutter more ‘zombie’ enterprises, or firms with inefficient surplus capacity and saddled with debt.
