Suffering from supply-side reforms
In recent years, China's coal and steel industries have been suffering from the government's supply-side reform policies. To understand how these reforms—particularly capacity reductions—affected profitability, GrassrootsSM
Research talked to a number of managers at China's state-owned and private coal and steel manufacturers. Among our key findings:
Over half our sources did not meet production capacity targets for 2016, and profitability has suffered
"The findings indicate that on-the-ground staff were quite skeptical about meeting the de-capacity targets," said Research Analyst Rose Lu. "We were also interested to learn that satisfactory profitability has not yet returned, and that steel is faring worse than coal."
Slowdowns projected for 2017
Looking ahead to 2017, coal manufacturer sources expect 16%
More changes should help big players in excess-capacity sectors return to moderate profitability
permanent and 10% temporary shutdowns on average, while steel manufacturers expect permanent and temporary shutdowns of 8% each. In view of these expected changes, Senior Portfolio Manager Christina Chung added, "Overall, we believe that supply discipline and gradual de-capacity should improve the supply/demand imbalance and potentially help big players in these excess-capacity sectors return to moderate profitability. However, protectionism from the Trump administration would hurt the demand outlook. Still, we believe that China's government will support economic growth and keep demand stable by increasing infrastructure investment and accelerating the 'One Belt, One Road' strategy."